Question

Assertion (A): At the time of change in profit sharing ratio, goodwill of the firm is not valued because there is no admission or retirement of a partner.

Reason (R): Goodwill of the firm is valued at the time of change in profit sharing ratio because the gaining partners compensate the sacrificing partners.

In the context of the above two statements, which of the following is correct?

Options

• Both (A) and (R) are correct and (R) is the correct explanation of (A).

• Both (A) and (R) are correct but (R) is not the correct explanation of (A).

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

Only (R) is correct.

Explanation:

1. Goodwill is valued even when there is a change in the profit-sharing ratio.
2. Goodwill is valued so that the gaining partners compensate the sacrificing partners for their share of goodwill.