Practice Questions

A firm's capital is Rs. 4,00,000 and the normal rate of return is 10%. The average profits of the firm are Rs. 55,000. Calculate the value of goodwill based on 3 years' purchase of super profits.

Define goodwill as an intangible asset of a partnership firm.

What is a Revaluation Account?

Evaluate the fairness of the principle that a new partner is not entitled to any share in the accumulated profits or reserves of the old firm.

Define the term 'reconstitution of a partnership firm'.

Formulate a single guiding principle that a partnership should follow when determining the new profit sharing ratio upon a partner's admission.

Name the two primary rights that a newly admitted partner acquires upon joining a partnership firm.

A and B are partners sharing profits 3:1. C is admitted for a 1/4th share. Analyze if the sacrificing ratio will be different from the old profit sharing ratio in this case.

Propose the most equitable method for distributing the premium for goodwill brought in by a new partner among the old partners.

Design a Revaluation Account and justify the placement of items on the debit or credit side based on the principles of nominal accounts.

Compare the accounting treatment of goodwill when it is paid privately by the new partner to the old partners versus when it is brought into the business.

A firm has earned average profits of Rs. 2,00,000. The value of its net assets is Rs. 15,00,000. The normal rate of return in the industry is 10%. Calculate the value of goodwill by the capitalisation of average profits method.

Ashok and Binod are partners. On the admission of Chetan, the value of machinery (book value Rs. 80,000) is to be appreciated by 20%, and a provision for doubtful debts is to be created at 5% on debtors amounting to Rs. 40,000. Demonstrate the journal entries for these adjustments.

Goodwill of a firm is valued at Rs. 90,000. At the time of admitting a new partner, the books already show a goodwill of Rs. 30,000. The old partners, P and Q, share profits in a 2:1 ratio. Demonstrate the journal entry to write off the existing goodwill.

Critique the default accounting assumption that, in the absence of an agreement, old partners sacrifice their share of profits in their old profit sharing ratio.

Propose a clause for a partnership deed to handle the valuation and treatment of unrecorded assets discovered during the admission of a new partner.

Identify three circumstances, apart from the admission of a new partner, that require the valuation of a firm's goodwill.

Describe the accounting treatment for accumulated profits, such as a General Reserve, at the time of a new partner's admission.

Analyze why it is necessary to revalue assets and reassess liabilities when a new partner is admitted into a firm.

Calculate the sacrificing ratio of P and Q who are partners sharing profits in the ratio of 5:3. They admit R for a 1/7th share, and the new profit sharing ratio is agreed at 4:2:1.

Explain the concept of 'sacrificing ratio' in the context of the admission of a new partner.

List and describe five important matters that require adjustment in the books of a firm when a new partner is admitted.

Recall what is meant by the term 'hidden goodwill'.

Describe the main purpose of revaluing a firm's assets and reassessing its liabilities upon the admission of a new partner.

Anu and Binu are partners sharing profits in the ratio of 3:2. They admit Chinu for a 1/4th share. Chinu acquires his share from Anu and Binu in the ratio of 2:1. Calculate the new profit sharing ratio and the sacrificing ratio.

Examine the accounting treatment required if, at the time of admission of a new partner, the firm has a General Reserve of Rs. 50,000 and a debit balance of Rs. 10,000 in its Profit and Loss Account. The old partners A and B share profits in a 3:2 ratio.

Justify the decision to create a Revaluation Account upon the admission of a new partner, even when the book values of assets are considered reasonably accurate by the old partners.

Critique the accounting practice, as per AS 26, of not recognizing internally generated goodwill as an asset, especially in the context of a new partner's admission.

Create a scenario where the 'Hidden Goodwill' method is necessary and formulate the steps and journal entries required to account for it.

Justify debiting a new partner's current account instead of their capital account when they fail to bring their share of goodwill in cash.

Formulate a comprehensive policy for a partnership firm detailing the procedure for valuing and treating goodwill upon the admission of a new partner, covering scenarios where the premium is brought in cash, not brought in cash, and brought partially.

Evaluate the long-term implications for a partnership if existing goodwill in the books is not written off before the admission of a new partner.

A firm must choose between the 'Super Profits Method' and the 'Capitalisation of Average Profits Method' for goodwill valuation. Evaluate the circumstances where one method would be more appropriate and create a business case to support your evaluation.

Evaluate the potential conflicts that could arise if old partners decide on a sacrificing ratio that is different from their old profit sharing ratio, and propose a resolution strategy.

Ravi and Mohan are partners with capitals of Rs. 60,000 and Rs. 40,000 respectively. They admit Sohan for a 1/4th share in profits. Sohan brings Rs. 50,000 as his capital. Solve for the value of hidden goodwill of the firm.

Explain the Super Profits Method for goodwill valuation and list the steps required to calculate goodwill using this method.

Describe the two distinct approaches for calculating the value of goodwill under the Capitalisation Method.

Summarize the accounting treatment for goodwill when a new partner brings his share in cash and the amount is retained in the business.

Explain the proper accounting procedure if a goodwill account already exists in the books of the firm at the time of a new partner's admission.

Demonstrate the journal entry to adjust goodwill if Ram and Shyam, who share profits 2:1, change their profit sharing ratio to 1:1. The firm's goodwill is valued at Rs. 60,000, and no goodwill account is to be opened.

Calculate the amount of capital to be brought in by B if A and B are to have capitals proportionate to their profit sharing ratio. A's adjusted capital is Rs. 45,000 and B's is Rs. 15,000. C is admitted for a 1/4th share and brings in Rs. 20,000 as capital. The new ratio is 2:1:1.

Design a system using journal entries to adjust partners' capitals to be proportionate to their new profit sharing ratio, and justify when it would be better to use current accounts over cash settlements for this adjustment.

Examine the journal entries required when a new partner, Z, is admitted for a 1/5th share and is supposed to bring Rs. 25,000 as his share of goodwill but brings only Rs. 15,000 in cash. The amount is sacrificed by old partners X and Y equally.

Explain the Average Profits Method for the valuation of goodwill and describe the steps involved in its calculation.

Apply the principles of capital adjustment to solve the following: X and Y share profits 2:1. Z is admitted for a 1/4 share. After all adjustments, the capitals of X and Y are Rs. 63,680 and Rs. 38,840. Z brings Rs. 30,000 capital. Capitals are to be proportionate. Analyze the surplus or deficit in Y's capital account.