Question 1

1/-0

Capitalisation method for goodwill is used when:

SOLUTION

There are different methods for the calculation of self generated goodwill. Capitalisation method is one of them, it is mainly used when number of years purchase not given in the question. Capitalisation method can be used for both super profit and average profit.

Question 2

1/-0

If average profit of a business is Rs.50,000 and normal profits are Rs.60,000, it shows:

SOLUTION

Formula of super profit is : Average Profit – Normal Profit When normal profit is more than the average profit, it shows that there is no goodwill of the firm. In such a case do not show negative figure of goodwill or super profit. Super profit is the excess of average profit over normal profit. When super profit is positive, it shows the goodwill value of the firm

Question 3

1/-0

Internal Goodwill is calculated when:

SOLUTION

Internal goodwill or self generated goodwill is not required at all but it is calculated when a new partner is admitted, a partner retires, at the time of death of a partner and when there is change in the existing profit sharing ratio of the partners.

Question 4

1/-0

Annual profit shown by a business is Rs.20,000. Normal rate of return 10%. Total assets of the business firm Rs.2,40,000 and liabilities Rs.80,000. Value of Goodwill will be:

SOLUTION

Follow these steps to calculate the value of goodwill:
1. Calculation of Capital Employed : 2,40,000 – 80,000 = 1,60,000
2. Normal Profit = 1,60,000 × 10/100 = 16,000
3. Super Profit = 20,000 – 16,000 = 4,000
4. Goodwill = 4,000 × 100/10 = 40,000

Question 5

1/-0

Profits/losses of a firm for last 4 years are Rs. 10,000 (Loss) ; Rs.15,000 profit ; 20,000 profit ; Rs.15,000 profit. Calculate Goodwill at 1 ½ years purchase of average profits of last 4 years .

SOLUTION

Calculation of Goodwill:
1. Total profit = 15,000 + 20,000 + 15,000 – 10,000 = 40,000
2. Average Profit = 40,000/4 = 10,000
3. Goodwill = 10,000 × 1.5 = 15,000

Question 6

1/-0

Example of cash equivalent is___

SOLUTION

Cash equivalents refers to those items which can be converted into cash in a very short period of time (say 3 months). In simple words, cash equivalents means those assets which are equal to the cash because they can be transfer in cash immediately, so they are treated as cash equivalents. Stock, prepaid expenses and loose tools are not cash equivalents.

Question 7

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Accounting Standard ____ requires goodwill should be recorded in the books of accounts only when some money or money’s worth is paid for it.

SOLUTION

As per Accounting Standard 26, issued by Institute of Chartered Accountants of India, Goodwill should be recorded in the books only when some consideration in money or money's worth has been paid for it.

Question 8

1/-0

__________ goodwill should not be recognized as an asset because it is not an identifiable resource controlled by an enterprise that can be measurable reliably at cost

SOLUTION

As per the Accounting Standard – 26 issued by ICAI regarding intangible assets, goodwill should be recorded in the books of accounts only when some money or money’s worth is paid for it. Internally generated goodwill should not be recorded in the books.

Question 9

1/-0

According to AS – 26 goodwill should be recorded in the books only when some consideration in money or money’s worth has been paid for it. This statement is

SOLUTION

True, This definition is really exists. As per Accounting Standard 26, issued by Institute of Chartered Accountants of India, Goodwill should be recorded in the books only when some consideration in money or money's worth has been paid for it.

Question 10

1/-0

A, B and C are partners sharing profits in the ratio of capitals (old 5:3:2 and new 2:3:5).Their capital after adjustment in new capital ratio are ` 20,000, ` 30000, ` 50000. Who will bring the amount of actual cash for adjustment?

SOLUTION

1.Total Capital = 20,000 + 30,000 + 50,000 = 1,00,000
2.Capitals before adjustments were : 50,000; 30,000 and 20,000 (5:3:2)
3.After adjustment = Rs.20,000, 30000,and 50000 (2:3:5)
4.C will bring amount = old capital 50,000 – New capital 20,000 = 30,000

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