Question

To value the goodwill of a partnership firm at the time of its reconstitution, which one of the following items is added back to the previous year’s profit to find the normal profit?

Options

• Gain from sale of shares

• Insurance premium paid

• Undervaluation of closing stock

• Overvaluation of closing stock

Answer 1

Undervaluation of closing stock

Explanation:

Undervaluation of closing stock reduces the profit of the previous year. To arrive at the normal profit while valuing goodwill, such abnormal or incorrect reductions in profit are added back.