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Admission of a Partner Test - 61

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Admission of a Partner Test - 61
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  • Question 1
    1 / -0
    A admitted as a new partner for 1/ 4 share of future profits, fails to bring in cash of Rs. 5,000 towards goodwill but the existing (old) partners B and C sharing profits in the ratio of 3 : 2 raise goodwill account at its full value. Therefore, partners will be credited for goodwill as:
    Solution
    Old ratio (B and C) = 3 : 2
    A is admitted for 1/4 share of profit for which he was supposed to bring goodwill of Rs. 5000 
    According to A's share total goodwill of the firm is A's share to goodwill multiply by reciprocal of A's share of profit
    Therefore, total goodwill = Rs. 5000 * (4/1) = Rs. 20000
    Goodwill credited to old partner in old ratio is-
    B = Rs. 20000 * (3/5) = Rs. 12000
    C = Rs. 20000 * (2/5) = Rs. 8000
  • Question 2
    1 / -0
    Sadhu, Mahatma and Fakir are equal partners. Fakir wanted to retire for which value of goodwill is considered as Rs. 6,00,000. The necessary journal entry will be:
    Solution
    Profit sharing ratio of Sadhu, Mahatma and Fakir is in proportion of 1 : 1 : 1, Herein, after called as old ratio. After retirement of Fakir, profit sharing ratio of Sadhu and Mahatma is 1 : 1, Herein, after called as new ratio. 
    calculation of gaining and sacrificing ratio of partners:

    Partner

    Old share

    New share

    Gain

    Sacrifice

    Sadhu

    1/3

    1/2

    1/6

    -

    Mahatma

    1/3

    1/2

    1/6

    -

    Fakir

    1/3

    -

    -

    1/3


    Therefore, Fakir's share of goodwill is :

    Rs. 600000 * (1/3) = Rs. 200000

    Adjusting entry would be :

    Sadhu's capital A/c         Dr.                       100000

    Mahatma's capital A/c         Dr.                  100000

                           To Fakir's capital A/c                          200000

    (The amount of share of goodwill adjusted on Fakir's retirement)

  • Question 3
    1 / -0
    Goodwill is recorded in the books when:
    Solution
    Goodwill - It is the value of reputation of a firm in respect of profits expected in future over and above the normal rate of profits. As per the provisions of accounting standard 26, goodwill is recorded in books only when the goodwill is purchased during business purchase. it means money or money's worth should be paid for acquiring goodwill to record it in books.
  • Question 4
    1 / -0
    Ram and Shyam are partners in a firm with capital of Rs 4,80,000 and Rs 3,10,000, respectively. They admitted Ganesh as a partner with l/4th share of profit. Ganesh brings Rs 3,00,000 as his capital. Ganesh's share of goodwill will be __________.
    Solution
    When in the question goodwill is not specifically given, then it is case of hidden goodwill.
    Calculation of hidden goodwill:
    Hidden goodwill = (Incoming partner's capital * Reciprocal of share of incoming partner) - Total capital after taking into consideration the capital brought in by new partner
    Hidden goodwill = [Rs. 300000 * (4/1)] - Rs. (480000 + 310000 + 300000)
    Hidden goodwill = Rs. 1200000 - Rs. 1090000
    Hidden goodwill = Rs. 110000
    Ganesh's share of goodwill for 1/4th share = Total goodwill/4
    Ganesh's share of goodwill for 1/4th share =  Rs. 110000/4
    Ganesh's share of goodwill for 1/4th share =  Rs. 27500
  • Question 5
    1 / -0
    Capital employed in a business is Rs. 1,50,000. Profits are Rs. 50,000 and the normal rate of profit is 20%. The amount of goodwill as per Capitalisation Method would be:
    Solution
    Capitalization method of valuing goodwill:
    Under this method, the value of a whole business is determined by applying normal rate of return. If such value (arrived at by applying normal rate of return) is higher than the capital employed in the business, then the difference is goodwill.
    Calculation of goodwill under capitalisation method is:
    Goodwill = (Average profit/ Normal rate of return) - Capital employed
    Goodwill = Rs. (50000/ 20%) -  Rs. 150000
    Goodwill = Rs. 250000 - Rs 150000
    Goodwill = Rs. 100000
  • Question 6
    1 / -0
    The need for valuation of goodwill arises at the time of _______ of a business.
    Solution
    Goodwill is one of the special aspects of partnership accounts which requires adjustment at the time of reconstitution of a firm, i.e., a change in the profit sharing ratio, the admission of a partner or the retirement or death of a partner. The need for valuation of goodwill arises at the time of sale of a business. But goodwill may also arise in the following circumstances under partnership firm:
    1. Change in the profit sharing ratio amongst the existing partners
    2. Admission of new partner
    3. Retirement of a partner
    4. Death of  a partner
    5. Amalgamation of partnership firms
  • Question 7
    1 / -0
    If the business is centrally located or is at a place having heavy customer traffic, then the goodwill tends to be ______.
    Solution
    Goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. Location is one of the factor affecting the value of goodwill, where the goodwill tends to be high, if the business is centrally located or is at a place having heavy customer traffic.
  • Question 8
    1 / -0
    The important methods of valuation of goodwill are:
    Solution
    Since goodwill is an intangible asset it is very difficult to accurately calculate its value. Goodwill calculated by one method may differ from the goodwill calculated by another method. The method by which goodwill is calculated, may be specifically decided between the existing partners and the incoming partner. Average Profits Method, Super Profits Method and Capitalisation Method are the important methods of valuation of goodwill.
  • Question 9
    1 / -0
    P and Q are two partners sharing profit and loss equally. P draws Rs. 4,000 at the end of each month for 6 months whereas Q draws Rs. 2,000 at the beginning of each month for six months. Assuming that interest on drawing is to be charged @ 5% p.a interest on drawing of P will be ____________.
  • Question 10
    1 / -0
    The reputation of a business expressed in terms of money.
    Solution
    Goodwill is one of the special aspects of partnership accounts which requires adjustment (also valuation is not specified) at the time of reconstitution of a firm. Over a period of time, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, monetary value of such advantage is known as "goodwill". It is regarded as an intangible asset. In other words, goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits.
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