Question by CA (Dr.) G.S.GREWAL, Series – 3

Fill in the Blank

  1. Goodwill is valued with a purpose to compensate _______ partner(s) by the ________ partners.

True / False

  1. Large Customer base results in higher valuation of Goodwill.

Multiple Choice Question

  1. Which of the following statement is Correct?

(a)    Goodwill is a fictitious asset.

(b)    Goodwill is a current asset.

(c)    Goodwill is a wasting asset.

(d)    Goodwill is an intangible asset.

Answer Series – 3

  1. Sacrificing, Gaining
  1. True

Reason If a customer is large in size then they demand more of good and ultimately goodwill of that product increases.

  1. (d)

Reason Goodwill is an intangible asset as it cannot be seen or touched but has a value.

Question Series – 6

  1. Two factors affecting goodwill are efficient management, repeated customers leading to higher sales and profit thus; it leads to higher value of goodwill.
  1. A firm earns profit of ₹ 1,10,000. The Normal Rate of Return is 10% on Capital.  Assets of the firm are ₹ 11,00,000 and Liabilities ₹ 1,00,000. Value of Goodwill by Capitalisation of Average Profit will be _____________________.
  1. In the event of firm’s business being taken over, the amount paid in excess of net assets (Assets – Liabilities) is debited to

(a)    Profit and Loss Account

(b)    Capital Accounts

(c)    Reserve Account

(d)    Goodwill Account.

Answer Series – 6

  1. True

Reason: Management if efficient leads to higher profits and thus, increase in the value of Goodwill. Similarly repeated Customer’s leads to increased sale and thus higher profits increase in value of Goodwill.

  1. ₹ 1,00,000
  1. (d)

Reason: Amount paid in excess of net assets is not on account of any asset but for acquiring a running business and in effect to earn profit from the day the business is taken over. Hence it is debited to Goodwill Account.

Question Series – 13

  1. Weighted Average Method of calculating goodwill is useful when Profits are similar in all the years
  2. Goodwill is not valued by the firm at the time of  ___________.
  3. Capital employed by a firm is ₹5,00,000. Its average profit is ₹60,000.The normal rate of return in similar type of business is 10%. The amount of super profits is
  • ₹50,000
  • ₹10,000
  • ₹6,000
  • ₹56,000

Answer Series – 13

  1. False

Reason: Weighted Average Method of calculating goodwill is used when profit shows a trend because profits of latest years indicate the profit the firm is likely to earn in coming years.

  1. Dissolution of firm
  1. (b)

Reason: Capital Employed = ₹5,00,000

Average Profit = ₹60,000

Normal Profit = Capital Employed × NRR/100

= ₹5,00,000 × 10/100

= ₹50,000

Super Profit = Average Profit – Normal Profit

= ₹60,000 – ₹50,000

= ₹10,000.

Question Series – 16

  1. As per Accounting Standard – 26, Both purchased and self-generated goodwill are accounted in the books of accounts.
  1. Capital employed by a partnership firm is ₹5,00,000. Its average profit is ₹ 60,000. The normal rate of return in similar type of business is 10%. The amount of Super Profit is ______________.
  1. Average profit of a business over the last five years was ₹60,000. The normal  yield on capital invested in such a business is estimated at 10% p.a. The net capital invested in the business is ₹5,00,000. Amount of goodwill, if it is based on 3 years purchase of last 5 years super profits will be :
  • ₹1,00,000
  • ₹1,80,000
  • ₹30,000
  • ₹1,50,000

Answer – 16

  1. False

Reason: According to AS-26 only purchased goodwill is accounted in the books of account. Self-generated goodwill is not accounted as its value is subjective in nature.

  1. ₹ 10,000
  1. (c)

Reason: – Average Profit = ₹60,000

Normal Profit = Capital Employed × NRR/100

= ₹5,00,000 × 10/100

= ₹50,000

Super Profit = Average Profit – Normal Profit

=₹10,000

Goodwill = Super Profit × Number of year’s purchase

= ₹10,000 × 3

= ₹30,000

Question Series – 35

  1. Total Capital employed in the firm is ₹8,00,000, Normal Rate of Return is 15% and profit for the year is ₹1,20,000.Value of goodwill as per Capitalization Method would be ₹4,20,000.
  1. Capital invested in a firm is ₹ 5,00,000. Normal Rate of Return is 10%. Average profits of the firm are ₹ 64,000 (after abnormal loss of ₹ 4,000). Value of Goodwill at four years purchase of Super Profits will be ___.
  1. Profit earned over the last 5 years are as follows: ₹60,000; ₹65,000 ₹70,000 ₹90,000 and ₹ 10,000 (loss). Based on 2 years purchase of the last 5 years profits, value of Goodwill will be:
  • ₹23,600
  • ₹22,000
  • ₹1,10,000
  • ₹1,18,000

Answer Series – 35

  1.  False

Reason: Capitalised value of the business=(Average Profit ×100)/NRR

=(₹1,20,000 ×100)/15

= ₹8,00,000

Capital employed = ₹8,00,000

Goodwill = ₹8,00,000 – ₹8,00,000

= Nil

  1. ₹ 72,000
  1. (c)

Reason: –

Average Profit=(₹60,000+₹65,000+₹70,000+₹90,000-₹10,000)/5

Average Profit = ₹55,000

Goodwill = Average Profit × Numbers of year’s purchase

= ₹55,000 × 2

Goodwill = ₹1,10,000

Question – Series 65

  1. Net assets of a firm including fictitious assets of ₹ 5,000 are ₹ 85,000. Net liabilities of the firm are ₹ 30,000. Normal Rate of Return is 10% and the Average Profits of the firm is ₹ 8,000. Value of  goodwill as per Capitalisation of Super Profit Method will be ₹  30,000.
  2. Customer Satisfaction __________ the value of goodwill.
  3. Average Capital Employed of a firm is ₹ 4,00,000 and the Normal Rate of Return is 15% .Average profit of the firm is ₹ 80,000 per annum. If management cost is estimated at ₹ 10,000 per annum, then on the basis of two years purchase of Super-Profit, value of Goodwill will be :
  4. ₹ 10,000
  5. ₹ 20,000
  6. ₹ 60,000
  7. ₹ 80,000

Answer – Series 65

  1. True

Reason: Net Assets = ₹ 85,000 – ₹ 5,000

(Excluding fictitious assets) = ₹ 80,000

Net Liabilities = ₹ 30,000

Capital Employed = Net Assets – Net Liabilities

                        = ₹ 80,000 – ₹ 30,000

                       = ₹ 50,000

Normal Profit = Capital Employed × NRR/100

                   = ₹ 50,000 × 10/100

                   = ₹ 5,000

Super Profit = Average Profit – Normal Profit

                   = ₹ 8,000 – ₹ 5,000

                   = ₹ 3,000

(Capitalisation Super Profit)

Goodwill = Super Profit × 100/NRR

             = ₹ 3,000 × 100/10

Goodwill = ₹ 30,000

  1. increases
  2. (b)

Reason: – Actual Profit = ₹ 80,000 – ₹ 10,000

          = ₹ 70,000

          Super Profit = Actual Profit – Normal Profit

                            = ₹ 70,000 – ₹ 60,000

                            = ₹ 10,000

          Goodwill = Super Profit × Number of year’s purchase

                       = ₹ 10,000 × 2

                       = ₹ 20,000.

Question – Series 74

  1. Capital employed by a partnership firm is ₹ 5,00,000. Its average profit is ₹ 60,000.The normal rate of return in similar type of business is 10%. The amount of super profits is ₹ 10,000.
  2. Expenses expected to be incurred to earn profit are deducted to determine normal profit for valuation of ______________.
  3. Under the Capitalisation Method of Valuation of Goodwill the formula for calculating goodwill is :
  4. Super profits multiplied by the rate of return
  5. Average profits multiplied by the rate of return
  6. Super profits divided by the rate of return
  7. Average profits divided by the rate of return

Answer – Series 74

  1. True

Reason – Capital employed = ₹ 5,00,000

Average Profit = ₹ 60,000

Normal Profit = Capital Employed × NRR/100

                   = ₹ 5,00,000 × 10/100

                   = ₹ 50,000

Super Profit = Average Profit – Normal Profit

                   = ₹ 60,000 – ₹ 50,000

                   = ₹ 10,000.

  1. Goodwill
  2. (c)

Reason: – The formula for calculation of Goodwill as per Capitalisation Method of Goodwill = Super Profit × 100/NRR. Thus, Super Profit when divided by NRR and multiplied by 100  gives the value of Goodwill.

 

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