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Questions
State any three circumstances other than (i) admission of a new partner; (ii) retirement of a partner and (iii) death of a partner, when need for valuation of goodwill of a firm may arise.
State any three circumstances other than (i) death of a partner; (ii) admission of a partner and (iii) retirement of a partner, when need for valuation of goodwill of a firm may arise.
List the circumstances under which need for valuation of goodwill of the firm may arise.
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Solution
Valuation of goodwill is also arises in the following cases:
(i) When the partnership firm is sold to some other concern on going concern basis.
(ii) When two firms amalgamate that is merger or acquisition of two businesses.
(iii) When the existing partners in the firm jointly agree to change the profit sharing ratio between them.
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RELATED QUESTIONS
Vikas, Vishal and Vaibhav were partners in a firm sharing profits in the ratio of 2:2:1. The firm closes its books 31st March every year. On 31-12-2015 Vaibhav died. On that date his Capital account showed a credit balance of Rs. 3, 80,000 and Goodwill of the firm was valued at 1, 20,000. There was a debit balance of Rs. 50,000 in the profit and loss account. Vaibhav's share of profit in the year of his death was to be calculated on the basis of the average profit of last five years. The average profit of last five years was Rs. 75,000.
Pass necessary journal entries in the books of the firm on Vaibhav's death.
Kumar, Gupta and Kavita were partners in the firm sharing profits and losses equally. The firm was engaged in the storage and distribution of canned juice and its godowns were located at three different places in the city. Each godown was being managed individually by Kumar, Gupta and Kavita. Because of increase in business activities at the godown managed by Gupta, he had devoted more time. Gupta demanded that his share in the profits of the firm be increased, to which Kumar and Kavita agreed. The new profit sharing ratio was agreed to be 1: 2: 1. For this purpose, the goodwill of the firm was valued at two years purchase of the average profits of last five years. The profits of the last five years were as follows :
| Years |
Profit Rs |
|
| I | 4,00,000 | |
| II | 4,80,000 | |
| II | 7,33,000 | |
| IV | Loss | 33,000 |
| V | 2,20,000 |
You are required to:
1) Calculate the goodwill of the firm
2) Pass necessary Journal Entry for the treatment of goodwill on the change in profit sharing ratio of Kumar, Gupta and Kavita.
Joshi, Pandey and Agarwal were partners in a firm sharing profits in the ratio of 2:2:1. On 31.3.2014, their Balance Sheet was as follows:
| Liabilities |
Amount Rs |
Assets |
Amount Rs |
|
Creditors Bills Payable Agarwal's Loan Capitals Joshi 2,10,000 Pandey 2,04,000 |
51,000 36,000 84,000
4,14,000 |
Cash Debtors Bills payable Furniture Machinery Agarwal’s Capital |
24,000 39,000 27,000 81,000 3,75,000 39,000 |
| 5,85,000 | 5,85,000 |
On 31.12.2014, Agarwal died. The partnership deed provided for the following to the executors of the deceased partner:
(a) His share in the goodwill of the firm, calculated on the basis of three year's purchase of the average profits of the last four years. The profits of the last four years were Rs 2,70,000; Rs 3,00,000; Rs 5,40,000 and Rs 8,10,000 respectively.
(b) His share in the profits of the firm till the date of his death, calculated on the basis of the average profits of the last four years.
(c) Interest @12% per annum on the credit balance, if any, in his Capital account.
(d) Interest on his loan @12% per annum.
Prepare Agarwal's Capital Account to be presented to his executors.
For which share of Goodwill a partner is entitled at the time of his retirement?
How does the market situation affect the value of goodwill of a firm?
State 'True' or 'False'
When goodwill is paid privately, no entry in the books of account is required.
State ‘True’ or ‘False’:
If the goodwill account raised up, goodwill account is debited.
Explain the treatment of goodwill at the time of retirement or on the event of death of a partner?
Aparna, Manisha and Sonia are partners sharing profits in the ratio of 3:2:1. Manisha retires and goodwill of the firm is valued at Rs 1,80,000. Aparna and Sonia decided to share future in the ratio of 3:2. Pass necessary Journal entries.
Explain how will you deal with goodwill when new partner is not in a position to bring his share of goodwill in cash ?
Asin and Shreyas are partners in a firm. They admit Ajay as a new partner with 1/5th share in the profits of the firm. Ajay brings ₹ 5,00,000 as his share of capital. The value of the total assets of the firm was ₹ 15,00,000 and outside liabilities were valued at ₹ 5,00,000 on that date. Give the necessary Journal entry to record goodwill at the time of Ajay's admission. Also show your workings.
A and B are partners sharing profits in the ratio of 2 : 1. They admit C for a `1/4`th share in profits. C brings in ₹ 30,000 for his capital and ₹ 8,000 out of his share of ₹ 10,000 for goodwill. Before admission, goodwill appeared in books at ₹ 18,000. Give Journal entries to give effect to the above arrangement.
Hints:
- Goodwill of ₹ 18,000 written off by A and B in 2 : 1.
- Goodwill of ₹ 8,000 brought in cash by C will be credited to the Premium for Goodwill A/c.
- Premium for Goodwill A/c will be debited by ₹ 8,000 and C’s Current A/c will be debited by ₹ 2,000 and the Capital Accounts of A and B will be credited in 2 : 1.
Keith, Bina, and Veena were partners in firm sharing profits and losses equally. Their balance sheet as on 31-3-2019 was as follows:
|
Balance Sheet of Keith, Bina, and Veena as on 31-3-2019 |
||||
| Liabilities |
Amount (₹) |
Amount (₹) |
Assets | Amount (₹) |
| Capitals: |
|
3,25,000 |
Plant and Machinery | 2,40,000 |
| Keith | 1,50,000 | Stock | 60,000 | |
| Bina | 1,00,000 | Sundry debtors | 35,000 | |
| Veena |
75,000 |
Cash at bank | 50,000 | |
| General Reserve |
|
30,000 |
||
| Sundry creditors |
|
30,000 |
||
| 3,85,000 | 3,85,000 | |||
Veena died on 30th June 2019. According to the partnership deed, the executors of the deceased partner were entitled to :
- Balance in the capital account
- Salary till the date of death @ ₹ 25,000 per annum.
- Share of goodwill calculated on the basis of twice the average profits of the past three years.
- Share of profit from the closure of the last accounting year till the date of death on the basis of the average of three completed years profits before death.
- Profits for 2016-17, 2017-18 and 2018-19 were ₹ 1,20,000, ₹ 90,000 and ₹ 1,50,000 respectively.
Veena withdrew ₹ 15,000 on 1st June 2019 for paying her daughter’s school fees.
Prepare Veena’s capital account to be rendered to her executors.
Write a word/phrase/term which can substitute the following statement.
Name the method of the treatment of goodwill where new partner will bring his share of goodwill in cash.
State True or False with reason.
When goodwill is paid privately to the partners, it is not recorded in the books.
State True or False with reason.
A new partner always bring his share of goodwill in cash.
Find the Odd one.
Why is a new partner admitted?
What is the super profit method of calculation of goodwill?
Amount brought by a new partner for his share in goodwill is known as _____________.
In the absence of partnership deed, interest on capital and drawing to be:
Which items may appear on the credit side of the partner's current account?
Value of reputation of the firm is:
Old partnership will dissolve if:
When there is no Goodwill Account in the books and goodwill is raised, ____________ account will be debited.
Gini, Bini and Mini were in partnership sharing profits and losses in the ratio of 5:2:2. Their Balance Sheet as at 31st March, 2021 was as follows:
| Balance Sheet as at 31st March,2021 | |||||
| Liabilities | Amount (₹) | Assets | Amount (₹) | ||
| Sundry Creditors | 56,500 | Cash | 1,17,300 | ||
| Bank Overdraft | 61,500 | Debtors | 38,000 | ||
| Workmen’s Compensation Reserve | 32,000 | Less: Provision For Doubtful Debts | (2,300) | 35,700 | |
| Capitals: | Inventories | 1,34,000 | |||
| Gini | 4,60,000 | Machinery | 1,00,000 | ||
| Bini | 3,00,000 | Furniture | 1,80,000 | ||
| Mini | 2,90,000 | 10,50,000 | Building | 5,70,000 | |
| Goodwill | 63,000 | ||||
| 12,00,000 | 12,00,000 | ||||
On 31st March, 2021, Gini retired from the firm. All the partners agreed to revalue the assets and liabilities on the following basis:
- Bad debts amounted to ₹ 5,000. A provision for doubtful debts was to be maintained at 10% on debtors.
- Partners have decided to write off existing goodwill.
- Goodwill of the firm was valued at ₹ 54,000 and be adjusted into the Capital Accounts of Bini and Mini, who will share profits in future in the ratio of 5:4.
- The assets and liabilities valued as: Inventories ₹1,30,000; Machinery ₹ 82,000; Furniture ₹1,95,000 and Building ₹ 6,00,000.
- Liability of ₹23,000 is to be created on account of Claim for Workmen Compensation.
- There was an unrecorded investment in shares of ₹ 25,000. It was decided to pay off Gini by giving her unrecorded investment in full settlement of her part payment of ₹ 28,000 and remaining amount after two months.
Prepare Revaluation Account and Partners’ Capital Accounts as on 31st March, 2021.
Hem and Nern are partners in firm sharing profits in the ratio of 3:2. Their capitals were Rs. 80,000 and Rs. 50,000 respectively. They admitted Sam on Jan. 1 2019 as a new partner for 1/5 share in the future profits. Sam brought Rs. 60,000 as his capital. Calculate the value of goodwill of the firm.
What would be the journal entry for revaluation of an increase in the value of an asset?
Excess value of Purchase Consideration over Net Assets at the time of purchase of business is credited to:
Chaman, Raman, and Suman are partners sharing profits in the ratio of 5:3:2. Raman retires. The new profit-sharing ratio between Chaman and Suman will be 1:1. The goodwill of the firm is valued at ₹1,00,000. Raman's share of goodwill will be adjusted.
Mohit and Govind were partners in a firm with a ratio of 1:2. They admitted Ravi for 1/5th share in profits. He brought ₹2,50,000 for capital but could not bring goodwill. The goodwill of the firm was valued at ₹3,00,000. What Journal Entry will be passed for the treatment of goodwill?
Aayush and Aarushi are partners sharing profits and losses in the ratio of 3 : 2. They admitted Naveen into partnership for 1/4th share. Goodwill of the firm was to be valued at three years' purchase of super profits. Average net profit of the firm was ₹ 20,000. Capital investment in the business was ₹ 50,000 and Normal Rate of Return was 10%. Calculate the amount of Goodwill premium brought by Naveen.
Manas and Mili are partners in a firm sharing profits in the ratio of 3 : 2. Anita is admitted as a new partner for `1/4`th share in future profits. Capitals of Manas and Mili were ₹ 3,00,000 and ₹ 1,50,000 respectively. Anita brought ₹ 2,00,000 as her capital. The value of goodwill of the firm on Anita's admission.
G, S and T were partners sharing profits in the ratio 3:2:1. G retired and his dues towards the firm including Capital balance, Accumulated profits and losses share, Revaluation Gain amounted to ₹ 5,80,000. G was being paid ₹ 7,00,000 in full settlement. For giving that additional amount of ₹ 1,20,000, S was debited for ₹ 40,000. Determine goodwill of the firm.
Find out super profit, if capital employed is ₹ 4,00,000, normal rate of return is 12% and average profit is ₹ 60,000.
______ = Average profit x No. of years of purchase
