Question

Assertion (A): Goodwill is an intangible asset which is recognised (recorded) in the books of accounts only when consideration has been paid for it.

Reason (R): Valuation of goodwill is necessary at the time of reconstitution of a firm because sacrificing partners have to be compensated by gaining 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 reason of (A).

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

• Only (R) is correct.

• Both (A) and (R) are wrong.

Answer 1

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

Explanation:

Goodwill is an intangible asset and is recorded in the books only when consideration in money or money’s worth has been paid for it, i.e., purchased goodwill. Valuation of goodwill is essential at the time of reconstitution of a firm because the sacrificing partners need to be compensated by the gaining partners for the change in profit-sharing ratios or admission of a new partner, which requires the goodwill to be properly valued and adjusted.