Short Answer Questions
Question 1.
Solution 1. A firm is reconstituted on the occasions of :-
1.) Change in the profit sharing ratio among the existing partners.
2.) Admission of an existing partner.
3.) Retirement of an existing partner.
4.) Death of a partner.
5.) Amalgamation of two or more partnership firms.
Question 2.
Solution 2. Following adjustments are required at the time of reconstitution of a partnership firm:
(i) Determination of Sacrificing Ratio and Gaining Ratio
(ii) Accounting for Goodwill.
(iii) Accounting Treatment of Reserves and Accumulated Profits
(iv) Accounting for Revaluation of Assets and Liabilities.
(v) Adjustment of Capitals.
Question 3.
Solution 3. The purpose of calculating sacrificing ratio is to determine the amount of compensation to be paid by the gaining partner (i.e. the partner whose share has increased as a result of change) to the sacrificing partner (i.e. the partner whose share has decreased as a result of change). Such compensation is usually paid on the basis of proportionate amount of goodwill.
Question 4.
Solution 4 Below are the features of goodwill:-
1.) It is an intangible asset.
2.) It does not have an existence separate from that of an enterprise. Thus, is has realisable value when business is sold.
3.) The value of goodwill is the subjective assessment of the value.
Question 5.
Solution 5 Below are the four factors of affect the goodwill of a partnership firm:-
1.) Favourable Location of the business:- If the business is located at a convenient or prominent place, it will attract more customers and therefore will have more goodwill.
2.) Efficiency of Management:- If the business is run by experienced and efficient management, its profits will go on increasing which result in increase in the value of goodwill.
3.) Nature of Goodwill:- If a business deals in goods of daily use, it will have steady profit as the demand for these goods will be stable. Such business will have more goodwill. But if it deals in fancy goods, its profit will be uncertain and as such the value of the goodwill will be less.
4.) Capital Required:- The amount of capital required for a business will also influence the value of goodwill. If two business enterprises earn the same rate of profit, the business with lesser capital requirement shall enjoy more goodwill.
Question 6.
Solution 6 The need for valuing the goodwill in partnership arise in the following circumstances:
1.) When there is a change in the profit sharing ratio among the existing partners.
2.) When a new partner is admitted.
3.) When a partner retires or dies.
4.) When the firm is sold.
5.) When the firm is amalgamated with another firm.
Question 7.
Solution 7
1.) Average Profit Method:- This is a very simple and widely followed method of valuation of goodwill. In this method, goodwill is calculated on the basis of the number of past year profits. Average of such profits is multiplied by the agreed number of years to find out the value of goodwill. Thus the formula is :
Value of Goodwill = Average Profit × Number of Year of Purchases.
2.) Super Profit Method:- In this method goodwill is calculated on the basis of surplus profit earned by a firm in comparison to average profits earned by other firms. If a business has no anticipated excess earning, it will have no goodwill. Of super profits.
Thus the formula is:
Question 8.
Solution 8 Number of year purchase is used to calculate the value of goodwill in average profit method and super profit method at the time of valuation of goodwill.
Example:- If a firm earns a profit of Rs. 60,000 p.a. on an average basis and the normal rate of return is 10% p.a. Capital employed amount Rs. 4,00,000. Capitalised value of average profit will be:
Rs. 60,000 × = Rs. 6,00,000
Goodwill = Rs. 6,00,000 – Rs. 4,00,000 = Rs. 2,00,000
Question 10.
Solution 10
Question 11.
Solution 11 A change in profit sharing ratio basically implies that one partner is purchasing from another partner, a share of profit previously belonging to the latter. The purchasing or gaining partner must compensate the sacrificing partner by paying the proportionate amount of goodwill. In other word, the gaining partner should pay the sacrificing partner that share of goodwill which is equal to the share gained by him.
If the profits of the firm are Rs. 1,00,000 p.a. A will lose Rs. 20,000 and B will gain Rs. 20,000 annually. This must be compensated by B by paying to A an amount equal to 1/5 th of total value of goodwill of the firm. If the goodwill is valued at Rs. 2,50,000 i.e. Rs. 50,000. Such an adjustment is made by passing an adjustment entry wherein B’s Capital Account will be debited and A’s Capital Account will be Credited with Rs. 50,000.
Question 12.
Solution 12 At the time of change in the profit sharing ratio, there are Reserves or Accumulated profits/losses existing in the books of the firm, these should be transferred to the Partner’s Capital Accounts or to Current Accounts in their old profit sharing ratio.
Question 13.
Solution 13 Yes, it is necessary to revalue Assets and liabilities of a firm must also be revalued at the time of change in profit sharing ratio of existing partners. The reason is that the realisable of actual value of assets and liabilities may be different from those shown in the balance sheet. It is possible that will the passage of time some of the assets might have appreciated in value while the value of certain other assets might have decreased and no record has been made of such changes in the books of accounts.
Question 14.
Solution 14 Reserves and accumulated profits are credited to the capital accounts of all partners in their old profit sharing ratio because they have been set apart out of the profits earned in the period before change. If they are not adjusted at present, they will get adjusted later in their new profit sharing ratio which will result in loss to the sacrificing partner and gain to the gaining partner.
Question 15.
Solution 15 Anand would have given the argument that Workmen Compensation Reserve was created out of profits when their profit sharing ratio was 2 : 1. Hence, it should be credited in the old profit sharing ratio.
Question 16.
Solution 16 Priya would have given the argument that unrecorded asset belonged old firm when the profit sharing ratio was 2 : 1. Hence it should be Credited to Revaluation Account so that the profit on account of this asset shared in 2:1.
Question 17.
Solution 17 Dinesh must have given the argument that liability towards salaries related to the old firm when the profit sharing ratio was 3:1. Hence, it should be debited to Revaluation Account so that the loss on account of this liability could be bome 3:1. If it was recorded at the time of actual payment, the partners will bear the loss in 2:1.
Numerical Questions
Question 1. (A)
Solution 1 (A) Old Ratio of X and Y = 5 : 3
New Ratio of X and Y = 1 : 1
Calculation of Sacrifice or Gaining Ratio =
Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.
Question 1.(B)
Solution 1 (B)
Old Ratio of A and B = 1 : 1
New Ratio of A and B = 4 : 3
Calculation of Sacrifice or Gaining Ratio =
Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.
Question 2. (A)
Solution 2 (A)
Old Ratio of A, B and C = 4 : 3 : 1
New Ratio of A, B and C = 5 : 4 : 3
Calculation of Sacrificing or Gaining Ratio =
Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.
Question 2. (B)
Solution 2 (B)
Old Ratio of Mahesh, Naresh and Om = 2 : 3 : 4
New Ratio of Mahesh, Naresh and Om = 1 : 2 : 3
Calculation of Sacrificing or Gaining Ratio =
Point of Knowledge:-
Here the negative value of is gaining and positive value is sacrificing.
Question 3.
Solution 3. Total Profit = Rs. 2,00,000 – Rs. 3,00,000 + (Rs. 4,50,000 – Rs. 50,000) + Rs. 3,50,000 + Rs. 2,60,000
Total Profit = Rs. 10,00,000
Goodwill = Average Profit × Number of year purchases
Goodwill = 2,00,000 × 4
Goodwill = 8,00,000
Question 4.
Solution 4.
Question 5.
Solution 5
Based on 4 Years of Profit
Total Profit = Rs. 1,20,000 + Rs. 1,50,000 + Rs. 1,10,000 + Rs. 2,00,000
Total Profit = Rs. 5,80,000
Four years average profit is more than 5 years average profit. Therefore the value of goodwill will be
Goodwill = Average Profit × Number of year purchases
Goodwill = 1,45,000 × 3
Goodwill = 4,35,000
Question 6.
Solution 6
Question 7.
Solution 7
Question 8.
Solution 8.
Question 9.
Solution 9.
Question 10.
Solution 10.
Total Profit = Rs. 80,000 + Rs. 1,00,000 + Rs. 1,20,000 + Rs. 1,80,000
Total Profit = Rs. 4,80,000
Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 75,000
Super Profit = Rs. 45,000
Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 45,000 × 3
Goodwill = Rs. 1,35,000
Question 11.
Solution 11
Calculation of Actual Average Profit:-
Actual Average Profit = Average Profit + Abnormal Loss
Actual Average Profit = Rs. 41,000 + Rs. 2,000
Actual Average Profit = Rs. 43,000
Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 43,000 – Rs. 30,000
Super Profit = Rs. 13,000
Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 13,000 × 5
Goodwill = Rs. 65,000
Question 12.
Solution 12
Calculation of Actual Average Profit:-
Actual Average Profit = Average Profit – Remuneration to Partners
Actual Average Profit = Rs. 1,00,000 - Rs. 10,000
Actual Average Profit = Rs. 90,000
Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 90,000 – Rs. 75,000
Super Profit = Rs. 15,000
Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 15,000 × 2
Goodwill = Rs. 30,000
Question 13.
Solution 13
Goodwill = Super Profit × Number of year’s Purchases
Rs. 1,50,000 = Super Profit × 3
Super Profit = Rs. 1,50,000 ÷ 3
Super Profit = Rs. 50,000
Total Profit = Rs. 80,000 + Rs. 1,30,000 + Rs. 1,56,000
Total Profit = Rs. 3,66,000
Question 14.
Solution 14
Calculation of Capital Employed
Capital Employed = Rs. 5,00,000 + Rs. 4,00,000 + Rs. 1,50,000 + Rs. 30,000
Capital Employed = Rs. 10,80,000
Super Profit = Actual Average Profit – Normal Profit
Super Profit = Rs. 2,00,000 – Rs. 1,62,000
Super Profit = Rs. 38,000
Goodwill = Super Profit × Number of year Purchases
Goodwill = Rs. 38,000 × 3
Goodwill = Rs. 1,14,000
C’s Share of Goodwill = Rs. 1,14,000 × 1/4
C’s Share of Goodwill = Rs. 28,500
Question 15.
Solution 15
Goodwill = Super Profit × Number of year Purchases
Rs. 60,000 = Super Profit × 4
Super Profit = Average Profit – Normal Profit
Rs. 15,000 = Average Profit – Rs. 8,800
Average Profit = Rs. 15,000 + Rs. 8,800
Average Profit = Rs. 23,800
Working Note:-
Calculation of Capital Employed:-
Capital Employed = Total Assets – Current liabilities
Capital Employed = Rs. 1,20,000 – Rs. 10,000
Capital Employed = Rs. 1,10,000
Question 16.
Solution 16
Goodwill = Super Profit × Number of year Purchases
Rs. 64,000 = Super Profit × 4
Super Profit = Average Profit – Normal Profit
Rs. 16,000 = Average Profit – Rs. 94,000
Average Profit = Rs. 16,000 + Rs. 94,000
Average Profit = Rs. 1,10,000
Working Note:-
Calculation of Capital Employed:-
Capital Employed = Total Assets – Creditors
Capital Employed = Rs. 5,00,000 – Rs. 30,000
Capital Employed = Rs. 4,70,000
Question 17.
Solution 17.
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 8,00,000 – Rs. 5,00,000
Capital Employed = Rs. 3,00,000
Goodwill = Capitalised Value of Average Profits – Capital Employed
Goodwill = Rs. 4,00,000 – Rs. 3,00,000
Goodwill = Rs. 1,00,000
Question 18.
Solution 18
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 6,00,000 + Rs. 5,00,000 + Rs. 5,00,000 – Rs. 60,000 – Rs. 30,000 + Rs. 10,000
Capital Employed = Rs. 15,20,000
Goodwill = Capitalised Value of Average Profits – Capital Employed
Goodwill = Rs. 20,00,000 – Rs. 15,20,000
Goodwill = Rs. 4,80,000
Question 19.
Solution 19 Capital Employed = Assets – Liabilities
Capital Employed = Rs. 8,00,000 – Rs. 5,00,000
Capital Employed = Rs. 3,00,000
Normal Profit = Rs. 3,00,000 × 12%
Normal Profit = Rs. 36,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 48,000 – Rs. 36,000
Super Profit = Rs. 12,000
Question 20.
Solution 20
Total Profit = Rs. 20,000 + Rs. 60,000 – Rs. 10,000 + Rs. 60,000 + Rs. 50,000 + Rs. 72,000
Total Profit = Rs. 2,52,000
(i) Four year's purchase of average profits:
Value of goodwill at 4 year’s purchase of average profits = Rs. 42,000 × 4 = Rs 1,68,000
(ii) Four year’s purchases of super profits:
Normal Profit = Rs. 2,00,000 × 15%
Normal Profit = Rs. 30,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 42,000 – Rs. 30,000
Super Profit = Rs. 12,000
Value of Goodwill at 4 year’s Purchases of Super profit = Rs. 12,000 × 4 = Rs. 48,000
Question 21.
Solution 21 Total Profit = Rs. 36,000 + Rs. 32,000 + Rs. 40,000
Total Profit = Rs. 1,08,000
Question 22.
Solution 22 Calculation of Sacrificing and Gaining Ratio:-
Question 23.
Solution 23 Total Profit = Rs. 48,000 + Rs. 60,000 + Rs. 90,000
Total Profit = Rs. 1,98,000
Question 24.
Solution 24
Question 25.
Solution 25.
Question 26.
Solution 26
Question 27.
Solution 27
Question 28.
Solution 28
Question 29.
Solution 29
Question 30.
Solution 30.
Question 31.
Solution 31
Question 32. (A)
Solution 32 (A)
Question 32. (B)
Solution 32 (B)
Varun = 3/5-2/3 = (9 - 10)/15 = 1/15 (Gain)
Arun will Sacrifice for Varun = Rs. 4,50,000 × 1/15 = Rs. 30,000
Question 33.
Solution 33
Question 34.
Solution 34
Question 35.
Solution 35
Question 36.
Solution 36
Question 37.
Solution 37
Question 38.
Solution 38
Question 39.
Solution 39
Question 40 (new).
Solution 40 (new). Working Note:-
Calculation of Sacrificing Ratio:-
Sacrifice Ratio= Old Ratio - New Ratio
Question 40.
Solution 40
Question 41.
Solution 41
Question 42. (new).
Solution 42 (new).
Question 42.
Solution 42
Question 43.
Solution 43
Question 44.
Solution 44
Question 45.
Solution 45
Normal Profit = Capita Employed × Normal Rate of Return
Normal Profit = Rs. 7,00,000 × 7/100
Normal Profit = Rs. 49,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 80,000 – Rs. 49,000
Super Profit = Rs. 31,000
Goodwill = Super Profit × Number of Year’s Purchase
Goodwill = Rs. 31,000 × 5
Goodwill = Rs. 1,55,000
Working Note:-
Adjustment Profit = Average Profit earned by the firm + Under Valuation of Stock
Adjustment Profit = Rs. 75,000 + Rs. 5,000
Adjustment Profit = Rs. 80,000
Question 46.
Solution 46
Question 47.
Solution 47
Question 48 (new).
Solution 48 (new).
Average Profit = (Total Profit)/(Number of Purchases )
Total Profit = Rs. 1,00,000 – Rs. 30,000 + Rs. 1,70,000 + Rs. 1,10,000 + Rs. 2,00,000
Total Profit = Rs. 5,50,000
Average Profit = (Rs. 5,50,000)/(5 )
Average Profit = Rs. 1,10,000
Goodwill = Rs. 1,10,000 × 2.5 = Rs. 2,75,000
Question 48.
Solution 48
Working Note:-
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 4,00,000 – Rs. 90,000
Capital Employed = Rs. 3,10,000
Question 49.
Solution 49
Goodwill = Super Profit × Number of year purchases
50,000 = Super Profit × 2.5
Super Profit = Average Profit – Normal Profit
Rs. 25,000 = Average Profit – Rs. 38,000
Average Profit = Rs. 25,000 + Rs. 38,000
Average Profit = Rs. 63,000
Question 50.
Solution 50
Goodwill = Super Profit × Number of year purchases
75,000 = Super Profit × 3
Normal Profit = Rs. 48,000
Super Profit = Average Profit – Normal Profit
Rs. 20,000 = Average Profit – Rs. 48,000
Average Profit = Rs. 48,000 + Rs. 20,000
Average Profit = Rs. 68,000
Question 51.
Solution 51
(i) Value of Goodwill on the basis of two year’s purchase of Super profits:
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 60,000
Super Profit = Rs. 60,000
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 60,000 × 2
Goodwill = Rs. 1,20,000
Goodwill = Capitalised Value of Average Profit – Net Assets
Goodwill = Rs. 8,00,000 – Rs. 4,00,000
Goodwill = Rs. 4,00,000
Question 52.
Solution 52
Normal Profit = Rs. 20,00,000 × 12% = Rs. 2,40,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 3,00,000 – Rs. 2,40,000
Super Profit = Rs. 60,000
Question 53 (new). Yash and Karan were partners in an interior designer firm. Their fixed capitals were Rs. 6,00,000 and Rs. 4,00,000 respectively. There were credit balances in their current accounts of Rs. 4,00,000 and Rs. 5,00,000 respectively. The firm had a balance of Rs. 1,00,000 in General Reserve. The firm did not have any liability. They admitted Radhika into partnership for 1/4th share in the profits of the firm. The average profits of the firm for the last five years were Rs. 5,00,000. Calculate the value of goodwill of the by capitalization of average profit method. The normal rate of return in the business is 10%.
Solution 53 (new). Calculation of Goodwill:-
Average profit of the firm = Rs. 5,00,000
Capitalised value of business = Rs. 50,00,000
Net Assets = All Assets – Outside liabilities
Net Assets = Rs. 6,00,000 + Rs. 4,00,000 + Rs. 4,00,000 + Rs. 5,00,000 + Rs. 1,00,000
Net Assets = Rs. 20,00,000
Capitalisation of average profit method:-
Goodwill = Capitalised value of business – Net Assets
Goodwill = Rs. 50,00,000 – Rs. 20,00,000
Goodwill = Rs. 30,00,000
Question 53.
Solution 53
(i) Three year’s purchase of average profit:-
Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 96,000 × 3
Goodwill = Rs. 2,88,000
(ii) Three year’s purchase of super profit:-
Normal Profit = Rs. 6,20,000 × 12% = Rs. 74,400
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 96,000 – Rs. 74,400
Super Profit = Rs. 21,600
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 21,600 × 3
Goodwill = Rs. 64,800
Question 54 (new).
Solution 54 (new). (i) Value of Goodwill on the basis of two year’s purchase of Super profits:
Average Profit = Total / number of purchases
Total Profit = Rs. 1,90,000 + Rs. 2,20,000 + Rs. 2,50,000
Total Profit = Rs. 6,60,000
Average Profit = Rs. 6,60,000 / 3
Average Profit = Rs. 2,20,000
Average Profit for Goodwill = Average Profit – Partners Remuneration
Average Profit for Goodwill = Rs. 2,20,000 – Rs. 1,00,000
Average Profit for Goodwill = Rs. 1,20,000
Normal Profit = Capital Employed × Noramal Rate of Return / 100
Normal Profit = Rs. 4,00,000 × 15 / 100
Normal Profit = Rs. 60,000
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,20,000 – Rs. 60,000
Super Profit = Rs. 60,000
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 60,000 × 2
Goodwill = Rs. 1,20,000
(ii) Value of Goodwill by Capitalisation of Average Profit method:-
Capitalised Value of Average Profit = Average Profit × 100 / Noramal Rate of Return
Capitalised Value of Average Profit = Rs. 1,20,000 × 100 / 15
Capitalised Value of Average Profit = Rs. 8,00,000
Goodwill = Capitalised Value of Average Profit – Net Assets
Goodwill = Rs. 8,00,000 – Rs. 4,00,000
Goodwill = Rs. 4,00,000
Question 54.
Solution 54
Question 55.
Solution 55
Question 56 (new).
Solution 56 (new).
(i) Three year’s purchase of average profit:-
Goodwill = Average Profit × Number of year purchases
Goodwill = Rs. 96,000 × 3
Goodwill = Rs. 2,88,000
(ii) Three year’s purchase of super profit:-
Normal Profit = Rs. 6,20,000 × 12% = Rs. 74,400
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 96,000 – Rs. 74,400
Super Profit = Rs. 21,600
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 21,600 × 3
Goodwill = Rs. 64,800
Capitalised value of Average Profit = Rs. 8,00,000
Capital Employed = Assets – Liabilities
Capital Employed = Rs. 6,80,000 – Rs. 60,000
Capital Employed = Rs. 6,20,000
Goodwill = Capitalised value of Average Profit – Capital Employed
Goodwill = Rs. 8,00,000 – Rs. 6,20,000
Goodwill = Rs. 1,80,000
Question 56.
Solution 56
Question 57.
Solution 57
Question 58.
Solution 58
Question 59.
Solution 59
Question 60 (new).
Solution 60 (new).
Total Profit = Rs. 60,000 + Rs. 1,50,000 + Rs. 1,70,000 + Rs. 1,90,000 – Rs. 70,000
Total Profit = Rs. 5,00,000
Question 60.
Solution 60
Super Profit = Average Profit – Normal Profit
Super Profit = Rs. 1,08,000 – Rs. 66,000
Super Profit = Rs. 42,000
Goodwill = Super Profit × Number of year purchases
Goodwill = Rs. 42,000 × 2
Goodwill = Rs. 84,000
Distributable Profit = Goodwill – Loss on Revaluation
Distributable Profit = Rs. 84,000 – Rs. 21,000
Distributable Profit = Rs. 63,000
Question 61 (new).
Solution 61 (new).
Question 61.
Solution 61
Question 62 (new).
Solution 62 (new).
Goodwill = (Rs. 80,000) + Rs. 1,20,000 + Rs. 1,40,000 = Rs. 1,80,000
Total Distributable Amount = Goodwill + Reserve + Profit
Total Distributable Amount = Rs. 1,80,000 + Rs. 40,000 + Rs. 30,000
Total Distributable Amount = Rs. 2,50,000
Question 62.
Solution 62
Question 63 (new).
Solution 63 (new).
Question 64 (new).
Solution 64 (new).
