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Average Profit Method

The value of ...

Question

The value of the reputation of a firm in respect of the profits expected in future over and above the normal profits is ________.

A

goodwill

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B

patent

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C

copyrights

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D

trademark

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Solution

The correct option is B goodwill
Goodwill is one of the special aspects of partnership accounts which requires adjustment at the time of reconstitution of a firm. It is an intangible asset. Goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. Goodwill can be defined as "the present value of a firm's anticipated excess earnings".

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Q. Profit that a firm earns over and above the normal profit is called the ________.

Q. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They decide to admit C as a new partner w.e.f. 1st April, 2019. In future, profits will be shared equally. The Balance Sheet of A and B as at 1st April, 2019 and the terms of admission are:


BALANCE SHEET OF A AND B
Liabilities		Amount (₹)	Assets		Amount (₹)
Sundry Creditors		60,000	Cash in Bank		40,000
Outstanding Expenses		15,000	Sundry Debtors		36,000
Capital A/cs:			Stock		84,000
A	3,00,000		Furniture and Fittings		65,000
B	3,00,000	6,00,000	Plant and Machinery		4,50,000
		6,75,000			6,75,000

(a) Capital of the firm is fixed at ₹ 6,00,000 to be contributed by partners in the profit-sharing ratio. The difference will be adjusted in cash.
(b) C to bring in his share of capital and goodwill in cash. Goodwill of the firm is to be valued on the basis of two years' purchases of super profit. The average net profits expected in the future by the firm ₹ 90,000 per year. The normal rate of return on capital in similar business is 10%.
(c) The partners agreed to help maintain the plants and keep the area clean.
Calculate goodwill and prepare Partners' Capital Accounts and Bank Account.

Q. Bhuwan and Shivam were partners in a firm sharing profits in the ratio of 3 : 2. Their capitals were ₹ 50,000 and ₹ 75,000 respectively. They admitted Atul on 1st April, 2018 as a new partner for 1/4th share in future profits. Atul brought ₹ 75,000 as his capital. Calculate the value of goodwill of the firm and record necessary Journal entries for the above transactions on Atul's admission.

Q. A and B are partners in a firm sharing profits in the ratio of 4 : 1 . They decided to share future profits in the ratio of 3 : 2 w.e.f. 1st April,2018 . On that day, Profit and Loss Account showed a debit balance of ₹ 1,00,000.Pass journal entry to give effect to the above.

Q. Saloni and Shrishti were partners in a firm sharing profits in the ratio of

7 : 3

. Their capitals were

R s .2, 00, 000

1, 50, 000

respectively.They admitted Aditi on

1 s t

2013

as a new partner for

\frac{1 t h}{6}

share in future profits. Aditi brought

R s .1, 00, 000

as her capital.Calculate the value of goodwill of the firm and record necessary journal entries for the above transaction on Aditi's admission.

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