Advertisements
Advertisements
Question
Assertion (A): Goodwill exists only when a firm earns more profits than normal profits.
Reason (R): Self generated goodwill is shown in the books because consideration in money or money’s worth has been paid for it.
In the context of the above two statements, which of the following is correct?
Options
(A) and (R) both are correct and (R) correctly explains (A).
Both (A) and (R) are correct but (R) does not explain (A).
Both (A) and (R) are incorrect.
(A) is correct but (R) is incorrect.
Advertisements
Solution
(A) is correct but (R) is incorrect.
Explanation:
Goodwill exists only when a firm earns more than normal profits (super profits), indicating the firm’s ability to earn excess profits over the industry norm. However, self-generated goodwill is not shown in the books of accounts because it is not acquired by paying any consideration in money or money’s worth; only purchased goodwill is recorded in the books.
