ACCOUNTANCY

SUMMER ASSIGNMENT
(2024-25)

(Valuation of Goodwill)

1. The term 'Number of Years Purchase means

(a) The number of years during which the purchaser of Goodwill expects that the profit due to goodwill are
likely to arise in future.
(b) Number of years for which goodwill is purchased
(c) Number of years for which goodwill purchased will not help the firm in earning similar profits
(d) None of the above.
2. Weighted Average Profit Method of calculating goodwill is useful when
(a) Profits show a trend either rising or falling
(b) Profts are not similar over the years
(c) Profits are higher in one year and lower in another
(d) Profits are similar in all the year
3. Arrange the following steps involved for the Valuation of Goodwill by Average Profit Method:
1. Goodwill= Average Profit x No. of Years' Purchase.
2. Average Profit = Total Profits/No. of Years
3. Calculate normal profit or loss for each of the past year, after adjusting any abnormalities.
4. Calculate total profits by adding each relevant year's past profits.
(a) 4,2,3, 1 (b) 1,3,4,2 (c) 2,3,1,4 (d) 3,4,2,1.
4. Assertion (A): Goodwill is valued at the time of firm’s reconstitution because gaining partners have to
compensate the sacrificing partners for gaining profit share.
Reason (R): Goodwill is an intangible asset which is recognized in the books of account if an amount is paid
for it.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion
(A)
(b) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A)
(c) Assertion (A) is correct but the Reason (R) is not correct
(d) Both assertion (A) and Reason (R) are incorrect
5. Assertion (A): Value of goodwill is subjective and not an exact value.
Reason (R): Goodwill is based on accepted principles of valuation which are time tested. Hence, it is not
subjective.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Assertion (A) is correct but the Reason (R) is not correct.
(d) Both Assertion (A) and Reason (R) are incorrect.

6. The average profits for last 5 years of a firm are Rs. 20,000 and goodwill has been worked out Rs. 24,000
calculated at 3 years purchase of super profits. Calculate the amount of capital employed assuming the normal
rate of interest is 8 %.

7. Capital employed of a firm is 3, 00,000. The annual profit earned by the firm during the year is 48,000.
The money could be kept in a bank for 5 years at 10% p.a. considering 2% as fair compensation for risk
 involved in business, the goodwill of the firm on the basis of capitalization will be?

8. Bharat and Bhusan are partners in a retail business. Balances in their Capital & Current Accounts as on 31st
March, 2019 were as follows:
Capital Account (Rs.) Current Account (Rs.)
Bharat 4,00,000 4,80,000
Bhusan 1,00,000 20,000 (Dr)
The firm earned an average profit of Rs. 97,000. If the normal rate of return is 8 %, find the value of goodwill.

9. On 1st April, 2018, a firm had assets of Rs. 1,00,000 excluding stock of Rs. 20,000. The current liabilities
were Rs. 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the
Goodwill of the firm is valued of Rs. 60,000 at four years' purchase of super profit, find the actual profits of
the firm.
10. Sahil and Anupam are partners sharing profits in the ratio of 3:2. They admit Amit into partnership. It was
agreed to value goodwill at three years’ purchase on the basis of Weighted Average Profit of the past five
years. Weights being assigned to each year were:
31st March, 2015–1, 31st March, 2016–2, 31st March, 2017–3, 31st March, 2018–4 and 31st March,
2019–5.
The profits for these five years were:
Year Ended Profits (Rs.)
31st March, 2015 1,80,000;
31st March, 2016 1,60,000;
31st March, 2017 2,50,000;
31st March, 2018 3,00,000;
31st March, 2019 3,50,000.
Scrutiny of books of account revealed that:
1. An abnormal gain of Rs. 20,000 was earned in the year ended 31st March, 2016.
2. An abnormal loss of Rs. 10,000 was incurred in the year ended 31st March, 2017.
3. Expense of Rs. 50,000 incurred to overhaul a machine on 1st April, 2017 was debited to Profit & Loss
Account instead of being debited to Machinery Account. Depreciation is charged on Machinery @ 20% on
Written Down Value Method.
4. Closing Stock as on 31st March, 2018 was undervalued by Rs. 20,000.
Calculate value of goodwill.

11. Calculate the goodwill of a firm on the basis of three years’ purchase of the weighted average profit of the last
four years. The appropriate weights to be used and profits are:

On a scrutiny of the accounts, the following matters are revealed:

(i) On 1st December, 2017, a major repair was made in respect of the plant incurring Rs. 30,000 which was
charged to revenue. The said sum is agreed to be capitalised for goodwill calculation subject to adjustment of
depreciation of 10% p.a. on Reducing Balance Method.
(ii) The closing stock for the year 2016–17 was overvalued by Rs. 12,000.
(iii) To cover management cost, an annual charge of Rs. 24,000 should be made for the purpose of goodwill
valuation.
(iv) On 1st April, 2016, a machine having a book value of Rs. 10,000 was sold for Rs. 11,000 but the proceeds
were wrongly credited to Profit and Loss Account. No effect has been given to rectify the same. Depreciation is
charged on machine @ 10% p.a. on reducing balance method.
 (Change in PSR)

Multiple Choice Questions (MCQs)

1. Assets are revalued and liabilities are reassessed at the time of change in profit-sharing ratio so that
(a) assets and liabilities are shown at their present values.
(b) no partner is put to an advantage or disadvantage.
(c) sacrificing partner is partly compensated.
(d) assets and liabilities are shown at their market values.
2. Rakesh and Vinod are partners sharing profits and losses in the ratio of 3:2. They changed their profit-sharing
ratio to 2:3 w.e.f. 1st April, 2022. The assets were revalued, and liabilities were reassessed on that date which
resulted in a gain of Rs. 80,000. It will be transferred to their Capital Accounts by
(a) Debiting Rakesh’s Capital Account and Vinod’s Capital Account by Rs. 40,000 each.
(b) Debiting Rakesh’s Capital Account and Vinod’s Capital Account by Rs. 80,000 each.
(c) Crediting Rakesh’s Capital Account by Rs. 48,000 and Vinod’s Capital Account by Rs. 32,000.
(d) Crediting Rakesh’s Capital Account and Vinod’s Capital Account by Rs. 80,000 each.
3. Mamta, Daljit and Sonam are partners sharing profits equally which they changed to 2:2:1 w.e.f. 1st April,
2022. Their capitals on that date were Rs. 5,00,000 each. On that date, balances existed in the books as
General Reserve Rs. 1,50,000 and Workmen Compensation Reserve Rs. 2,00,000, against which Workmen
Claim of Rs. 50,000 existed. They decided to carry forward the balance of General Reserve and distribute
Workmen Compensation Reserve.
General Reserve that will be credited/debited to their Capital Accounts:
(a) Rs. 50,000 (Cr.); Rs. 50,000 (Cr.); and Rs. 50,000 (Cr.) respectively.
(b) Rs. 10,000 (Dr.); Rs. 10,000 (Dr.); and Rs. 20,000 (Cr.) respectively.
(c) Rs. 30,000 (Cr.); Rs. 30,000 (Cr.); and Rs. 60,000 (Dr.) respectively.
(d) Rs. 60,000 (Cr.); Rs. 60,000 (Cr.); and Rs. 30,000 (Cr.) respectively.
4. In which of the following situation, Partner’s Capital Account is credited?
(a) Transfer of Accumulated Profit or Reserves.
(b) Transfer of Revaluation Loss.
(c) Writing off the Existing Book Value of Goodwill (if any) appearing in the books of the firm.
(d) All of the above.
5. Pawan and Gaurav were partners in a firm sharing profits and losses in the ratio of 2:1. With effect from 1st
January, 2022, they decided to share profits and losses equally. Individual partner’s gain or sacrifice due to
change in the ratio will be
(a) Gain by Pawan 1/6, Sacrifice by Gaurav 1/6. (b) Sacrifice by Pawan 1/6, Gain by Gaurav 1/6.
(c) Gain by Pawan 1/2, Sacrifice by Gaurav 1/2. (d) Sacrifice by Pawan 1/2, Gain by Gaurav 1/2.
6. Bimal and Lalit are partners sharing profits and losses in the ratio of 3:2. They changed their profit-sharing
ratio to 2 : 3 w.e.f. 1st April, 2022. The assets were revalued, and liabilities were reassessed on that date which
resulted in a gain (profit) of Rs. 80,000. It was decided that the changed values will not be shown in the books
of accounts. It will be adjusted in their Capital Accounts by
(a) Debiting Bimal’s Capital Account and Crediting Lalit’s Capital Account by Rs. 16,000.
(b) Crediting Bimal’s Capital Account and Debiting Lalit’s Capital Account by Rs. 16,000.
(c) Debiting Bimal’s Capital Account and Crediting Lalit’s Capital Account by Rs. 80,000.
(d) Crediting Bimal’s Capital Account and Debiting Lalit’s Capital Account by Rs. 80,000.
7. Meera, Myra and Neera were partners sharing profits in the ratio of 2:2:1. They decided to share future
profits in the ratio of 7:5:3 with effect from 1st April, 2022. Their Balance Sheet as on that date showed a
balance of Rs. 45,000 in Advertisement Suspense Account. They decided to carry forward the amount of
Advertisement Suspense. Amount that will be debited/credited respectively to the capital accounts of Meera,
Myra and Neera for Advertisement Suspense Account will be
 (a) Rs. 18,000 (Dr.), Rs. 18,000 (Dr.) and Rs. 9,000 (Dr) respectively.
(b) Rs. 15,000 (Dr.), Rs. 15,000 (Dr.) and Rs. 15,000 (Dr.) respectively.
(c) Dr. Myra’s Capital A/c and Cr. Meera’s Capital A/c by Rs. 3,000.
(d) Dr. Meera’s Capital A/c and Cr. Myra’s Capital A/c by Rs. 3,000.
Assertion-Reason Based MCQs
8. Assertion (A): Unrecorded income when recorded is shown in the credit of Revaluation Account at the time
of Change in Profit-sharing Ratio.
Reason (R): It is shown in the credit of Revaluation Account because it is a liability.
In the context of above two statements, which of the following is correct?
(a) Assertion (A) and Reason (R) are correct but the Reason (R) is not the correct explanation of Assertion
(A).
(b) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A).
(c) Only Assertion (A) is correct.
(d) Both Assertion (A) and Reason (R) are incorrect.

9. A, B and C sharing profits and losses in the ratio of 5:3:2 decide to share profits and losses equally with effect
from 1st April, 2020. Goodwill of the firm is valued at Rs. 90,000. Pass Journal entries under each of the
following alternative cases:
Case 1. When goodwill does not appear in the books.
Case 2. When goodwill appears in the books at Rs. 60,000 and they agree on the following:
(a) Existing goodwill is written off.
(b) Existing goodwill is not written off, i.e., is carried in the books of the firm.

10. Aman, Chaman and Daman are partners sharing profits and losses in the ratio of 5:4:1. Their Balance Sheet as
at 31st March, 2020 was as follows:

Profit-sharing ratio w.e.f. 1st April, 2020 was decided to be equal. It was agreed among the partners to carry
out following adjustments:
(i) Stock to be reduced to Rs. 40,000.
(ii) Provision for Doubtful Debts to be written back, since all debtors are good.
(iii) Computers to be reduced by Rs. 20,000.
(iv) Out of the Salaries Payable, Rs. 10,000 was not payable as the employee left without notice.
(v) Outstanding Expenses were not payable.
(vi) An unrecorded asset (Motor Cycle) valued at Rs. 10,000 to be accounted.
(vii) Goodwill of the firm was valued at Rs. 50,000.
(viii) Total capital of the firm Rs. 6,00,000 was to be in profit-sharing ratio, excess capital to be withdrawn
and shortfall to be brought by the partner.
Prepare Revaluation Account, Partners’ Capital Accounts and Balance Sheet of the new firm.
11. Parth, Raman and Zaisha are partners in a firm manufacturing furniture. They have been sharing profits and
losses in the ratio of 5 : 3 : 2. From 1st April, 2022, they agreed to share future profits and losses in the ratio of 2
: 5 : 3. Their Balance Sheet showed a debit balance of Rs. 4,000 in Profit & Loss Account; balance of Rs. 36,000
in General Reserve and a balance of Rs. 12,000 in Workmen’s Compensation Reserve. It was agreed that:
(i) The goodwill of the firm be valued at Rs. 76,000.
(ii) The Stock (book value of Rs. 40,000) was to be depreciated by 8%.
(iii) Creditors amounting to Rs. 900 were not likely to be claimed. Hence, be written back.
(iv) Claim on account of Workmen’s Compensation was Rs. 20,000.
(v) Investments (book value Rs. 38,000) were revalued at Rs. 40,000.
Pass necessary Journal entries for the above.

(Admission of a New Partner)

1. Navya and Radhey were partners sharing profits and losses in the ratio of 3:1. Shreya was admitted for 1/5th
share in the profits. Shreya was unable to bring her share of goodwill premium in cash. The journal entry
recorded for goodwill premium is given below:

The new profit-sharing ratio of Navya, Radhey and Shreya will be:
a) 41: 7: 12 b) 13:12: 10 c) 3:1: 1 d) 5:3: 2
2. Kalki and Kumud were partners sharing profits and losses in the ratio of 5:3. On 1st April,2021 they admitted
Kaushtubh as a new partner and new ratio was decided as 3:2:1. Goodwill of the firm was valued as
₹3,60,000. Kaushtubh couldn’t bring any amount for goodwill. Amount of goodwill share to be credited to
Kalki and Kumud Account’s will be: -
(A) ₹ 37,500 and ₹22,500 respectively (B) ₹ 30,000 and ₹30,000 respectively
(C) ₹ 36,000 and ₹24,000 respectively (D) ₹ 45,000 and ₹15,000 respectively

3. For which of the following situations, the old profit sharing ratio of partners is used at the time of admission of
a new partner?
a. When new partner brings only a part of his share of goodwill.
b. When new partner is not able to bring his share of goodwill.
c. When, at the time of admission, goodwill already appears in the balance sheet.
d. When new partner brings his share of goodwill in cash.
4. A and B are in partnership sharing profits and losses in the ratio of 3:2. They admit C into partnership with
1/5th share which he acquires equally from A and B. Calculate new profit sharing ratio.

5. Atul and Neera were partners in a firm sharing profits in the ratio of 3 : 2. They admitted Mitali as a new
partner. Goodwill of the firm was valued at Rs. 2,00,000. Mitali brings her share of goodwill premium of Rs.
20,000 in cash, which is entirely credited to Atul’s Capital Account. Calculate the new profit sharing ratio.

6. A and B are sharing profits and losses in the ratio of 4 : 1. C is admitted as a new partner for 1/3rd share of
profits for which he pays Rs.3,00,000 as goodwill. If A and B agree to share future profits equally, then the
amount of goodwill to be credited to A is:
(a) 3,00,000 (b) 9,00,000 (c) 4,80,000 (d) 4,20,000
7. A and B are partners in a firm sharing profits and losses in the ratio of 3:2.On 1st April, 2019 they decided to
admit C their new ratio is decided to be equal. Pass the necessary journal entry to distribute Investment
Fluctuation Reserve of Rs. 60,000 at the time of C’s admission, when Investment appear in the books at Rs.
2,10,000 and its market value is Rs.1,90,000.
8. X and Y are partners with capitals of Rs. 50,000 each. They admit Z as a partner for 1/4th share in the profits
of the firm. Z brings in Rs. 80,000 as his share of capital. The Profit and Loss Account showed a credit
balance of Rs. 40,000 as on date of admission of Z. Give necessary journal entries to record the goodwill.

9. A, B and C were partners sharing profits and losses in the ratio of 6:3:1. They decide to take D into
partnership with effect from 1st April, 2019. The new profit-sharing ratio between A, B, C and D will be 3: 3:
3:1. They also decide to record the effect of the following without affecting their book values, by passing a
single adjustment entry:
Book Values
Rs.
General Reserve 1,50,000
Contingency Reserve 60,000
Profit and Loss A/c Cr. 90,000
Advertisement Suspense A/c (Dr.) 1,20,000
Pass the necessary single adjustment entry, through the Partner's Current Account.

10. X and Y are partners sharing profits in the ratio of 3:1. Z is admitted as a partner for which he pays Rs. 30,000
for goodwill in cash. X, Y and Z decide to share the future profits in equal proportion. You are required to
pass a single Journal entry to give effect to the above arrangement.