CBSE Class 12 Accountancy Goodwill Nature And Valuation Worksheet Set B

Goodwill : Nature & Valuation

Questions carrying 1 mark each

Question. State any two occasions when reconstitution of a partnership firm takes place.
Answer: Reconstitution of a partnership firm takes place in the following occasions: (i) Change in profit sharing ratio among existing partners, and (ii) Admission of a new partner.

Question. The partnership deed is silent on payment of salary to partners. Amita a partner claim that she manages the business, she should get monthly salary of rupees 10,000. Is she entitled for the salary?give reason.
Answer: No, she is not entitled to any salary. Reason: According to the Indian Partnership Act, 1932, in the absence of a partnership deed or if the deed is silent, no partner is entitled to any salary or remuneration for taking part in the conduct of the business.

Question. Why is value of goodwill ascertained when a firm is reconstituted.
Answer: Goodwill is valued at the time of reconstitution to ensure that the gaining partner compensates the sacrificing partner for the share of profit they are giving up.

Question. A partnership deed provides for interest on capital but there was loss instead of profit during the year 2019- 2020. At what rate will be the interest on capital be allowed.
Answer: No interest on capital will be allowed. Interest on capital is an appropriation of profit and is generally allowed only if there are profits, unless the deed specifically treats it as a charge against profits.

Question. What are super profits?
Answer: Super profits are the excess of actual average profits earned by a firm over the normal profits expected from the capital employed in the same type of business.

Question. X, Y and Z are sharing profits and losses in the ratio of 5:3:2. With effect from 1st April,2015 they decide to share the future profits and losses in the ratio of 5:2:3. Calculate each partners’ gain or sacrifice due to change in the ratio.
Answer: Sacrifice/Gain = Old Ratio - New Ratio
X = \( \frac{5}{10} - \frac{5}{10} = 0 \)
Y = \( \frac{3}{10} - \frac{2}{10} = \frac{1}{10} \) (Sacrifice)
Z = \( \frac{2}{10} - \frac{3}{10} = -\frac{1}{10} \) (Gain)

Question. Chander and Suman are partners in a firm. Without a partnership deed. Chander’s capital is Rs. 10000 and Suman’s capital is Rs. 14000. Chander has advanced the loan of Rs. 5000 and claims interest @ 12% p.a. on it. State with reason whether his claim is valid or not.
Answer: His claim for 12% interest is not valid. Reason: In the absence of a partnership deed, according to the Indian Partnership Act 1932, interest on a partner's loan is allowed at a fixed rate of 6% p.a. only.

Question. Give two circumstances under which fixed capital of the partner may change.
Answer: Fixed capital may change when: (i) Fresh/Additional capital is introduced by the partner, or (ii) A part of the capital is permanently withdrawn (Drawing against capital).

Question. Interest on capital will be paid to the partners if provided for in the partnership deed but only out of
(a) Profit
(b) Reserves
(c) Accumulated profits
(d) Goodwill
Answer: (a)

Question. A group of 40 people wants to form a partnership firm. They want your advice regarding the maximum number of persons that can be there in the partnership firm and the name of the act under whose provision it is given.
Answer: The maximum number of partners is 50. This limit is prescribed under Section 464 of the Companies Act, 2013, as read with Rule 10 of Companies (Miscellaneous) Rules, 2014.

Question. In the absence of a partnership deed, what is the the ratio in which the profits of a firm are divided among the partners?
Answer: Profits are divided equally among all partners.

Question. X and Y shared profits and losses in the ratio of 3:2. With effect from 1st April,2015 they agreed to share profits equally. The goodwill of the firm was valued at Rs. 60000. The necessary single adjustment entry will be
(a) Dr. Y and Cr X with Rs. 6000
(b) Dr. X and Cr Y with Rs. 6000
(c) Dr X and Cr. Y with Rs. 600
(d) Dr. Y and Cr X with Rs. 600
Answer: (a)

Question. A, B C were in the partnership sharing profit in the ratio of 4: 3 :1. The partners agreed-to share future profits in the ratio of 5:4:3. Calculate each partners gain or sacrifice due to change in ratio.
Answer: Sacrifice = Old - New (LCM of 8 and 12 is 24)
A = \( \frac{4}{8} - \frac{5}{12} = \frac{12-10}{24} = \frac{2}{24} \) (Sacrifice)
B = \( \frac{3}{8} - \frac{4}{12} = \frac{9-8}{24} = \frac{1}{24} \) (Sacrifice)
C = \( \frac{1}{8} - \frac{3}{12} = \frac{3-6}{24} = -\frac{3}{24} \) (Gain)

Question. The average profits of a firm is rupees 48000. The total assets of the firm are valued at Rs 800000. Value of other liabilities is rupees 500000. Average rate of return in the same business is 12%. Calculate goodwill from capitalisation of average profit method.
Answer: Capitalised Value of Average Profit = \( \frac{48,000 \times 100}{12} = 4,00,000 \)
Capital Employed (Net Assets) = Total Assets - External Liabilities = \( 8,00,000 - 5,00,000 = 3,00,000 \)
Goodwill = Capitalised Value - Capital Employed = \( 4,00,000 - 3,00,000 = 1,00,000 \)

Question. Interest on partners drawing under fluctuating capital account is debited to
(a) Partners capital account
(b) Profit and loss account
(c) Drawing account
(d) None of these
Answer: (a)

Questions carrying 3-4 marks each

Question. P, Q and R are partners in a firm. Their capital accounts stood at Rs.30,000, Rs.15,000 and Rs.15,000 respectively on 1stApril,2015. As per the provision of the deed: (1) R was to be allowed a remuneration of Rs.3,000 per annum, (2) Interest @5% p.a. was to be provided on capital and Profits were to be divided in the ratio of 2:2:1. Ignoring the above terms, net profit of Rs.18,000 for the year ended 31stMarch,2016 was divided among the three partners equally. Pass an adjustment entry to rectify the error. Show the working clearly.
Answer: Adjustment Entry:
P's Capital A/c Dr. 800
To Q's Capital A/c 200
To R's Capital A/c 600
(Working: Calculation of correct appropriations vs wrong distribution of 18,000 equally. Total interest on capital is 1,500+750+750=3,000. Remuneration is 3,000. Balance profit 12,000 shared in 2:2:1 ratio.)

Question. Mona, Nisha and Priyanka were partners sharing profits and losses equally. Their respective capitals wereRs.30,000, Rs.20,000 andRs.10,000. After closing the accounts for the year 2019 it was discovered that the interest on capital at the rate 6% p.a. was omitted before distributing the profits. Instead of changing the audited balance sheet it was decided to pass a single adjusting entry in the beginning of the year, so that the accounts of the previous years can be rectified. Pass the journal entry and show the working notes
Answer: Adjustment Entry:
Mona's Capital A/c Dr. 600
To Priyanka's Capital A/c 600
(Working: Total interest omitted = 1,800 + 1,200 + 600 = 3,600. This should have been credited to partners and debited as a loss in profit sharing ratio. Mona: 1,800 - 1,200 = 600 Cr; Nisha: 1,200 - 1,200 = 0; Priyanka: 600 - 1,200 = 600 Dr.)

Question. Ram, Shyam, Ghanshyam and Radheshyam are partners sharing profits and losses on the ratio of 4:3:3:2. Their respective fixed capitals on 31st March, 2016 were Rs. 1,20,000. 1,80,000, 2,40,000 and Rs. 1,80,000 respectively. After preparing the final accounts for the year ended 31st March, 2016, it was discovered that interest on capital @ 12% per annum was not allowed and interest on drawings amounting to Rs.. 4,000, Rs. 5,000, Rs. 3,000 and Rs. 2,400 respectively was also not charged.Pass the necessary adjustment journal entry showing your working clearly.
Answer: Net interest effect must be calculated per partner. Total Int on Capital = 14,400 + 21,600 + 28,800 + 21,600 = 86,400. Total Int on Drawings = 14,400. Net amount to be distributed = 72,000. Compare individual partner's net claim (IOC - IOD) with their share of the 72,000 profit impact in 4:3:3:2 ratio.

Question. Ravi and Mohan were partner in a firm sharing profits in the ratio of 7:5. Their respective fixed capitals were Ravi Rs. 10,00,000 and Mohan Rs. 7,00,000. The partnership deed provided for the following:- (i) Interest on capital @ 12% p.a. (ii) Ravi’s salary Rs. 6000 per month and Mohan’s salary Rs. 60000 per year. The profit for the year ended 31-03-2016 was Rs. 5,04,000 which was distributed equally without providing for the above. Pass an adjustment entry.
Answer: Calculate total Interest on Capital (1,20,000 + 84,000) and Salaries (72,000 + 60,000). Total Appropriations = 3,36,000. Residual Profit = 5,04,000 - 3,36,000 = 1,68,000. This residual profit should be in 7:5. Total due to Ravi: 1,20,000 + 72,000 + 98,000 = 2,90,000. Total due to Mohan: 84,000 + 60,000 + 70,000 = 2,14,000. Difference between these and 2,52,000 (equal share) gives the adjustment entry: Mohan's Current A/c Dr. 38,000 to Ravi's Current A/c 38,000.

Question. Sharma and Gupta decided to start a partnership firm to manufacture low cost jute bags as plastic bags were creating many environmental problems. They contributed capitals of 1,00,000 and 50,000 on 1st April, 2015 for this. Sharma expressed his willingness to admit Shakti as a partner without capital, who is specially abled but a very creative and intelligent friend of his. Gupta agreed to this. The terms of partnership were as follows : i. Sharma, Gupta and Shakti will share profits in the ratio of 2 : 2 : 1. ii. Interest on capital will be provided @ 6% p.a. Due to shortage of capital, Sharma contributed Rs. 25,000 on 30th September, 2015 and Gupta contributed 10,000 on 1st January, 2016 as additional capital. The profit of the firm for the year ended 31st March, 2016 was Rs. 1,68,900. a) Prepare Profit and Loss Appropriation Account for the year ending 31st March, 2016
Answer: Interest on Sharma's Capital: \( (1,00,000 \times 6\%) + (25,000 \times 6\% \times 6/12) = 6,000 + 750 = 6,750 \). Interest on Gupta's Capital: \( (50,000 \times 6\%) + (10,000 \times 6\% \times 3/12) = 3,000 + 150 = 3,150 \). Total IOC = 9,900. Divisible Profit = 1,68,900 - 9,900 = 1,59,000. Shakti's share (1/5) = 31,800; Sharma and Gupta's share (2/5 each) = 63,600 each.

Question. A, and B are partners sharing profit in the ratio 3:2 with capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs.25,000. During 2015 the profits of the year prior to calculation of interest on capital but after charging B’s salary amounted to Rs.1,25,000 .A provision of 5% of the profits is to be made in respect of managers commission. Prepare Profit and loss Appropriation account.
Answer: Gross Profit before B's salary = 1,25,000 + 25,000 = 1,50,000. Manager's commission = 5% of 1,50,000 = 7,500. Net Profit to P&L App = 1,42,500. Less: B's Salary 25,000 and IOC (30,000 + 18,000) = 48,000. Divisible Profit = 69,500 shared in 3:2.

Question. A business has earned average profit of Rs. 100000. During the last few years.and normal rate of return in similar business is 10%. Find out the value of Goodwill by (i) Capitalisation of super profit method (ii) Super profit method if the goodwill is valued at 3 years purchase of super profit. Assets of the business were Rs. 1000000 and its external liabilities Rs. 180000
Answer: Capital Employed = 10,00,000 - 1,80,000 = 8,20,000. Normal Profit = 10% of 8,20,000 = 82,000. Super Profit = 1,00,000 - 82,000 = 18,000.
(i) Goodwill (Capitalisation) = \( \frac{18,000 \times 100}{10} = 1,80,000 \).
(ii) Goodwill (Purchase method) = \( 18,000 \times 3 = 54,000 \).

Question. Mona, Nisha and Priyanka are partners in affirm. They contributed Rs 50,000 each as capital three years ago. At that time Priyanka agreed to look after the business as Mona and Nisha were busy. The profits for the past three years were Rs 15,000, Rs 25,000 and Rs 50,000 respectively. While going through the books of accounts;Mona noticed that the profit had been distributed in the ratio of 1:1:2, when she enquired from Priyanka about this, Priyanka answered and that since she looked after the business she should get more profit. Mona disagreed and it was decided to distribute profit equally respectively for the last three years. (a) You are required to make necessary corrections in the books of accounts of Mona, Nisha and Priyanka by passing an adjustment entry
Answer: Total Profit = 15,000 + 25,000 + 50,000 = 90,000. Wrong Distribution (1:1:2): Mona 22,500, Nisha 22,500, Priyanka 45,000. Correct Distribution (Equal): Mona 30,000, Nisha 30,000, Priyanka 30,000. Adjustment: Priyanka's Capital A/c Dr. 15,000 to Mona's Capital A/c 7,500 to Nisha's Capital A/c 7,500.

Question. A and B were partners sharing ratio 3:2.they admitted C for 1/5th share in firm .C is guaranteed a minimum profit of 2,00,000 for the year any deficiency in C’S share is to be borne by A and B in the ratio of 4:1 .LOSS for the year was 1,00,000.PASS NECESSARY JOURNAL ENTRIES
Answer: C's share in loss = 20,000. Since C is guaranteed 2,00,000 profit, the total deficiency to be borne by A and B is 2,20,000 (Loss recovery + profit guarantee). Deficiency share A: 1,76,000; B: 44,000. Final entries involve transferring loss to partners and adjusting the guarantee.

Question. A, B and C were partners in the ratio of 5:4:1. On 31st Dec. 2006 their balance sheet showed a reserve fund of Rs. 65,000, P&L A/c (Loss) of Rs. 45,000. On 1st January, 2007, the partners decided to change their profit sharing ratio to 9:6:5. For this purpose goodwill was valued at Rs. 1,50,000. The partners do not want to distribute reserves and losses and also do not want to record goodwill. You are required to pass single journal entry for the above.
Answer: Net effect calculation: Reserve (65,000) - Loss (45,000) + Goodwill (1,50,000) = 1,70,000. Calculate Gain/Sacrifice: A (\( \frac{5}{10} - \frac{9}{20} = \frac{1}{20} \) Sac), B (\( \frac{4}{10} - \frac{6}{20} = \frac{2}{20} \) Sac), C (\( \frac{1}{10} - \frac{5}{20} = -\frac{3}{20} \) Gain). Entry: C's Capital A/c Dr. 25,500 to A's Capital A/c 8,500 to B's Capital A/c 17,000.

Questions carrying 6 marks each

Question. Anwar, Bisvas and Divya are partners in a firm. Their capital accounts stood at Rs.8,00,000, Rs.6,00,000 and Rs.4,00,000 respectively on 1st april,2015. They shared profits and losses in the ratio of 3:2:1 respectively. Partners are entitled to interest on Capital @ 6% per annum and salary to Bisvas and Divya @Rs.4,000 per month and Rs.6,000 per quarter respectively as per the provisions of partnership deed. Biswas’s share of profit including interest on capital but excluding salary is guaranteed at a minimum of Rs.82,000 p.a. Any deficiency arising on that account shall be met by Divya. The profits for the year ended 31st march,2016 amounted toRs.3,12,000. Prepare profit and loss appropriation account and journal entries for the year ended 31st march, 2016.
Answer: Total Interest on Capital: 48,000 + 36,000 + 24,000 = 1,08,000. Salaries: Bisvas 48,000, Divya 24,000. Net Distributable Profit = 3,12,000 - 1,08,000 - 72,000 = 1,32,000. Bisvas's share in profit = 2/6 of 1,32,000 = 44,000. Bisvas's profit + IOC = 44,000 + 36,000 = 80,000. Guaranteed amount 82,000. Deficiency = 2,000 met by Divya.

Question. X, Y and Z were partners in a firm. Their capitals on 01.04.2015 were; X Rs. 2,00,000 , Y Rs. 2,50,000 and Z Rs. 3,00,000. the partnership deed provided for the following; (i) they will share profits in the ratio of 2 : 3 : 3. (ii) X will be allowed a salary of Rs. 12,000 p.a. (iii) Interest on capital will be allowed @ 12% p.a. During the year X withdrew Rs. 28,000 Y Rs. 30,000 and Z Rs. 18,000. for the year ended 31.3.2016 the firm earned a profit of Rs. 5,00,000. Prepare profit and loss Appropriation account and partners capital accounts.
Answer: Interest on Capital: X 24,000, Y 30,000, Z 36,000. Total IOC = 90,000. Salary to X = 12,000. Distributable Profit = 5,00,000 - 90,000 - 12,000 = 3,98,000 distributed in 2:3:3.

Question. ANIL, SANDHYA and NEETU are partners in a firm on 1stapril 2015 the balance in their capital accounts stood at Rs.14,00,000, Rs.6,00,000 and Rs.4,00,000 respectively. They shared profits in the proportion of 7:3:2 respectively. Partners are entitled to interest on capital @ 6% p.a. and salary to Sandhya @ Rs.50,000 p.a. and a commission of Rs.3,000 per month to Neetu as per the provision of the partnership deed. Sandhya share of profit (excluding int. on capital) is guaranteed at not less than Rs.1,70,000 p.a. Neetu’s shares of profit (including int. on capital but excluding salary) is guaranteed at not less than Rs. 1,50,000 p.a. any deficiency arising on that account shall be met by ANIL. The profit of firm for the year ended 31st march 2013 amounted to Rs.9,50,000. Prepare profit and loss appropriation account and necessary journal entries for the year ended 31st march 2016.
Answer: Total Interest on capital = 84,000 + 36,000 + 24,000 = 1,44,000. Sandhya salary = 50,000. Neetu commission = 36,000. Remaining profit = 9,50,000 - 1,44,000 - 50,000 - 36,000 = 7,20,000. Share in 7:3:2 ratio: Anil 4,20,000, Sandhya 1,80,000, Neetu 1,20,000. Sandhya's share 1,80,000 > 1,70,000 (No deficiency). Neetu's share + IOC = 1,20,000 + 24,000 = 1,44,000. Neetu's deficiency = 1,50,000 - 1,44,000 = 6,000 met by Anil.

Question. Anand and Sonu were childhood friends and colleagues in a company who were thinking of starting something of their own someday. On 1st Jan, 2015 they thought of starting a stationery depot for the financially backward children of their area. They also admitted Manoj a differently abled educated youth who was unemployed as a partner of their firm without any capital contribution. Sonu also approached RohitKaul from Jammu, who was also eager to start something of this sort having lot of funds at his disposal, and persuaded him to join them. The following terms where agreed upon: i) Anand, Sonu and Rohit will contribute 30,000; 50,000 and 400,000 respectively as capital. ii) Profit will be shared equally. iii) Interest on capital will be allowed @ 5% p.a. The Profits of the firm for the year ended 31st Dec 2015 were 50,000. Prepare Profit & Loss Appropriation Account and capital account of the firm for the year
Answer: Interest on capital: Anand 1,500, Sonu 2,500, Rohit 20,000. Total IOC = 24,000. Manoj receives no IOC. Distributable Profit = 50,000 - 24,000 = 26,000. Equal share among 4 partners = 6,500 each.

Question. (a) X, Y and Z were sharing profits and losses in the ratio of 5:3:2. They decided to share future profits and losses in the ratio of 2:3:5 with effect from 1st April, 2015. They decided to record the effect of the following, without affecting their book values: (i) Profit and Loss Account Rs.24,000 (ii) Advertisement Suspense Account Rs.12,000 Give adjustment entry for the above items. (b) On 1st April,2014 an existing firm had assets of Rs. 75000 including cash of Rs. 5000 The partners capital account showed a balance of Rs.60000 and the reserve constituted the rest. If the normal rate of return is 10% and goodwill of the firm is valued at Rs.24000 at four years purchase of super profit find the average profit of the firm.
Answer: (a) Net effect = 24,000 - 12,000 = 12,000. Ratio change: X (5/10 to 2/10 = 3/10 Sac), Y (0), Z (2/10 to 5/10 = 3/10 Gain). Entry: Z's Capital A/c Dr. 3,600 to X's Capital A/c 3,600. (b) Super Profit = \( 24,000 / 4 = 6,000 \). Capital Employed = 75,000 (Assets). Normal Profit = 10% of 75,000 = 7,500. Average Profit = Super Profit + Normal Profit = 6,000 + 7,500 = 13,500.

Multiple Choice Questions

Question. Goodwill is _____
(a) tangible asset
(b) intangible asset
(c) fictitious asset
(d) both (b) & (c)
Answer: (b)

Question. Goodwill of the firm on the basis of 2 years' purchase of average profit of the last 3 years is Rs. 25,000. Find average profit.
(a) Rs. 50,000
(b) Rs. 25,000
(c) Rs. 10,000
(d) Rs. 2500
Answer: (d)

Question. Calculate the value of goodwill at 3 years' purchase when: Capital employed Rs. 2,50,000; Average profit Rs. 30,000 and normal rate of return is \( 10\% \).
(a) Rs. 3000
(b) Rs. 25,000
(c) Rs. 30,000
(d) Rs. 15,000
Answer: (d)

Question. What are super profits
(a) Actual profit – Normal Profit
(b) Normal Profit - Actual profit
(c) Actual profit + Normal Profit
(d) None of the above
Answer: (a)

Question. The net assets of the firm including fictitious assets of 5,000 are 85,000. The net liabilities of the firm are 30,000. The normal rate of return is \( 10\% \) and the average profits of the firm are 8,000. Calculate the goodwill as per capitalization of super profits.
(a) Rs. 20,000
(b) Rs. 30,000
(c) Rs. 25,000
(d) None of the above
Answer: (b)

Question. Which of the following items are added to previous year’s profits for finding normal profits for valuation of goodwill.?
(a) Loss on sale of fixed assets
(b) Loss due to fire, earthquake etc
(c) Undervaluation of closing stock
(d) All of the above
Answer: (d)

Question. Under which method of valuation of goodwill, normal rate of return is not considered?
(a) Loss on sale of fixed assets
(b) Loss due to fire, earthquake etc
(c) Undervaluation of closing stock
(d) All of the above
Answer: (c)

Question. Following are the methods of calculating goodwill except:
(a) Super profit method
(b) Average profit method
(c) Weighted Average profit method
(d) Capital profit method
Answer: (d)

Question. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called :
(a) Surplus
(b) Super profits
(c) Reserve
(d) Goodwill
Answer: (d)

Question. When Goodwill is not purchased goodwill account can :
(a) Never be raised in the books
(b) Be raised in the books
(c) Be partially raised in the books
(d) Be raised as per the agreement of the partners
Answer: (a)

Question. The goodwill of the firm is not affected by:
(a) Location of the firm
(b) reputation of the firm
(c) Better customer services
(d) None of the above
Answer: (b)

Question. Weighted average profit method of calculating goodwill is used when:
(a) Profits are not equal
(b) Profits show a trend
(c) Profits are fluctuating
(d) None of the above
Answer: (b)

Question. Capital invested in a firm is 5,00,000. Normal rate of return is \( 10\% \). Average profit of the firm are 64,000 (after an abnormal loss of 4,000). Value of goodwill at four times the super profits will be:
(a) Rs. 72,000
(b) Rs. 40,000
(c) Rs. 2,40,000
(d) 1,80,000
Answer: (a)

Question. Under ---------- method, goodwill is the excess of capitalized value of business over actual capital employed.
Answer: Capitalisation of average profit

Question. The value of goodwill is based on ----------- judgment of the valuer.
Answer: Subjective

Question. When the value of goodwill of the firm is not given but has to be inferred on the basis of the net worth of the firm, it is called……………..
Answer: Hidden goodwill

Question. Goodwill is not valued during ………….
Answer: Dissolution of the firm

Question. If Super profit of a firm is 10,000, its value of goodwill will be ………….if rate of return is \( 8\% \)
Answer: 1,25,000

State true or false

Question. Location of business does not affect the goodwill of business.
Answer: False

Question. “Average profit method” takes into consideration the future maintainable profits.
Answer: True

Question. Goodwill can be sold in part.
Answer: False

Question. Purchased goodwill may arise on acquisition of an existing business concern.
Answer: True

Question. Self-Generated goodwill is recorded in the books of accounts as some consideration is paid for it
Answer: False

Question. Goodwill is a fictitious asset
Answer: False

Question. Goodwill is valued during dissolution of a firm
Answer: False

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