Question

Assertion (A): Value of goodwill is subjective and not an exact value under any method.

Reason (R): Value of goodwill is subjective because it is based on estimates as to number of years purchase or rate of return on capital employed.

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

Options

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

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

• Both (A) and (R) are false.

• (A) is false, but (R) is true.

Answer 1

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

Explanation:

The value of goodwill is subjective and cannot be exact under any method because it depends on estimates such as the number of years’ purchase or the rate of return on capital employed. These are based on judgment and assumptions, which vary, making goodwill valuation inherently subjective.