Retirement or Death of a partner Test

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Retirement or Death of a partner Test - 45

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Question 1
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:

A
Rs. 1,00,000

B
Rs. 1,50,000

C
Rs. 2,00,000

D
Rs. 3,00,000

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 2
1 / -0

The ratio at which the continuing partners take up the retiring partner's share is _________.

A
gaining ratio

B
sacrificing ratio

C
profit sharing ratio

D
loss sharing ratio

Solution

Gaining ratio is the ratio which is calculated after the retirement or death of the partners. It is opposite to the sacrificing ratio. It is calculated by subtracting the old ratio from the new ratio.
Question 3
1 / -0

Gaining ratio is equal to _________.

A
New ratio $$-$$ Old ratio

B
New ratio $$+$$ Old ratio

C
New ratio $$\times$$ Old ratio

D
New ratio $$+$$ Sacrificing ratio

Solution

Gaining ratio is the ratio which is calculated after the retirement or death of the partners. It is opposite to the sacrificing ratio. It is calculated by subtracting the old ratio from the new ratio.
Question 4
1 / -0

Goodwill means ____________.

A
good name or reputation of the business

B
it is an intangible real asset

C
the capacity of a business to earn profits in future

D
All the Above

Solution

Goodwill means name and fame of the business. It is an important asset for the company as it decides the capacity of a company to earn profits in the future. It is basically an intangible asset which cannot be seen but only felt. Likewise, it means good name of the business.
Question 5
1 / -0

___________ method is followed when the new partner does not bring in his share of goodwill in cash.

A
Premium

B
Revaluation

C
Reconstruction

D
Both a and b

Solution

When the new partner does not bring in his share of goodwill in cash, revaluation method is followed. In such a situation, the goodwill account is raised in the books of accounts by crediting the old partners in the old profit sharing ratio. The following are the two possibilities, when goodwill account is to be raised in the books of account:
a. No goodwill appears in the books at the time of admission
b. Goodwill already exists in books at the time of admission
Question 6
1 / -0

An example of an intangible asset is:

A
Goodwill

B
Debit balance of Profit and Loss Account

C
Preliminary expenses

D
Deferred revenue expenditure

Solution

Goodwill is an intangible asset that arises when one company purchases another for a premium value. Any excess of the amount of purchase consideration over the value of net assets of the transferor company acquired by the transferee company should be recognised as goodwill in the financial statements of transferee company.
Goodwill is considered as intangible asset because it is not a physical asset like building or equipment.
Question 7
1 / -0

The need for valuation of goodwill arises at the time of _______ of a business.

A
purchase

B
sale

C
agreement

D
closure

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 8
1 / -0

If the business is centrally located or is at a place having heavy customer traffic, then the goodwill tends to be ______.

A
low

B
high

C
same

D
medium

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 9
1 / -0

The important methods of valuation of goodwill are:

A
Average Profits Method

B
Super Profits Method

C
Capitalisation Method

D
All of the above

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 10
1 / -0

Under super profit basis, goodwill is calculated by:

A
No. of years purchased multiplied with average profits

B
No. of years purchased multiplied with super profits

C
Summation of the discounted value of expected future benefits

D
Super profit divided with expected rate of return

Solution

Goodwill is desirable to valued on the basis of the excess profits and not the actual profits. The excess of actual profits over the normal profits is termed as super profits.
Normal Profit = Capital Employed X Normal Rate of Return/100

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Re-Attempt Weekly Quiz Competition

Retirement or Death of a partner Test - 45

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Retirement or Death of a partner Test - 45

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SHARING IS CARING

Question 1

Rs. 1,00,000

Rs. 1,50,000

Rs. 2,00,000

Rs. 3,00,000

Solution

Question 2

gaining ratio

sacrificing ratio

profit sharing ratio

loss sharing ratio

Solution

Question 3

New ratio $$-$$ Old ratio

New ratio $$+$$ Old ratio

New ratio $$\times$$ Old ratio

New ratio $$+$$ Sacrificing ratio

Solution

Question 4

good name or reputation of the business

it is an intangible real asset

the capacity of a business to earn profits in future

All the Above

Solution

Question 5

Premium

Revaluation

Reconstruction

Both a and b

Solution

Question 6

Goodwill

Debit balance of Profit and Loss Account

Preliminary expenses

Deferred revenue expenditure

Solution

Question 7

purchase

sale

agreement

closure

Solution

Question 8

low

high

same

medium

Solution

Question 9

Average Profits Method

Super Profits Method

Capitalisation Method

All of the above

Solution

Question 10

No. of years purchased multiplied with average profits

No. of years purchased multiplied with super profits

Summation of the discounted value of expected future benefits

Super profit divided with expected rate of return

Solution

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