Explore topic-wise InterviewSolutions in Current Affairs.

1. Medicines are prepared by carrying out a chain of chemical changes. 

2. The materials such as plastics, soaps, detergents, perfumes, acids, bases, salts etc are all made by carrying out various types of chemical changes.

1. Bursting of balloon 

2. Breaking of glass 

3. Burning of paper

The changes in which only physical properties of substances is formed is called physical change. It is a reversible change. 

Ex:- Boiling and freezing of water.

1. Yes, I agree with this statement. 

2. Why because, when a piece of gold is melted, it’s chemical composition remains the same in the solid form and also in the liquid form.

Correct option is B) Chemical change

1. Changes which occur in short duration of time are called fast changes. 

2. Burning of paper, cutting of piece of cake, firing of crackers, spinning of a top are the examples of fast changes.

(a) Our nails grow 

(b) Our hair grow 

(c) We grow taller 

(d) Our weight increases

(a) Blowing of balloon 

(b) Rolling out roti from dough ball

1. Changes which take longer duration of time to happen are called slow changes. 

2. Examples for slow changes are growing of plant from seed to a tree, developmental changes in the child, rusting of iron, changes of season, formation of mountain etc.

1. Changes which do not occur at regular intervals of time and which can not be predicted are called non-periodic changes. 

2. Examples are pattern of rainfall, storms in seas, volcanic erruptions etc.

(a) Drying a wet clothes 

(b) Heating of milk

It is an irreversible changes.

1. The changes in which the formed substance can be converted into their original substance are called reversible changes. 

2. Example for reversible changes are melting of wax, magnetizing a needle using bar magnet etc.

1. The changes which are repeating at regular intervals of time are called as periodic changes. 

2. Formation of the full moon and new moon, occurrence of seasons in every year at regular intervals, the heart beats of human beings are examples for periodic changes.

Changes in which we cannot get the original substance by reversing the experimental conditions are called irreversible changes.

(a) Milk to cheese 

(b) Cooking of food

• Sacrifice ratio is the ratio sacrificed by the old partners to the new partner. 

• Sacrifice ratio is calculated in order to distribute the goodwill brought in cash by the new partner on account of admission.

Goodwill is an intangible asset it is very difficult to accurately calculate its value. Various methods have been advocated for the valuation of goodwill of a partnership firm, Goodwill calculated by one method may differ from the goodwill. Calculated by another method. Hence, the method by which goodwill is to be calculated, may be specifically decided between the existing partners and the incoming partner. 

The important methods of valuation of goodwill are as follows:

1. Average Profits Method. 

2. Supper Profits Method 

3. Capitalisation Method 

1. Average Profits Method: Under this method, the goodwill is valued at agreed number of . ‘years’ purchase of the average profits of the past few years. It is based on the assumption that a new business will not be able to earn any profits during the first few years of its operations.

2. Supper Profits Method : The basic assumption in the average profits (simple or weighted) method of calculating goodwill is that if a new business is set up, it will not be able to earn any profits during the first few years of its operations. Hence, the person who purchases an existing business has to pay in the form of goodwill a sum equal to the total profits he is likely to receive for the first‘few years’.

3. Capitalisation Methods: Under this method the goodwill can be calculated in two ways: 

(a) by capitalizing the average profits, or 

(b) by capitalizing the super profits.

(a) Capitalisation of Average Profits: Under this method, the value of goodwill is ascertained by deducting the actual capital employed (net assets) in the business from the capitalized value of the average profits on the basis of normal rate of return. This involves the following steps:

1. Ascertain the average profits based on the past few years’ performance. 

2. Capitalize the average profits on the basis of the normal rate of return to ascertain the capitalised value of average profits as follows: Average Profits × 100/Normal Rate of Return 

3. Ascertain the actual capital employed (net assets) by deducting outside liabilities from the total assets (excluding goodwill). 

Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities 

4. Compute the value of goodwill by deducting net assets from the capitalised value of average profits, i.e. (2) – (3).

The new partner is required to compensate the old partner’s for their loss of share in the super profits of the firm for which he brings in an additional amount known as premium or goodwill. This amount is shared by the existing partners in the ratio in which they forego their shares in favour of the new partner which is called sacrificing ratio.

The total capital of the firm may clearly be specified and it is agreed that the capital of each partner should be proportionate to his share in profits. In such a situation each partner’s capital (including the new partner’s capital to be brought by him) is calculated on the basis of his share in profits.

By bringing in additional amount or withdrawal of excess amount, the final capital of each partner can be brought up to the required level.

It may be noted that subject to agreement among the partners, surplus or deficiency in each old partners’ capital accounts can also be taken care of simply by transfer to their respective current accounts.

When goodwill already exists in books: It is quite possible that when a new partner brings in his share of goodwill in cash, some amount of goodwill already exists in books. In that case, after crediting the old partners by the amount of goodwill brought in by the new partner, the existing goodwill must be written off by debiting the old partners in their old profit sharing ratio. But, if it is decided that the goodwill may continue to appear in the books at its old value, the amount to be brought in by new partner will have to be proportionately reduced.

The incoming partner who acquires his share in the profits of the firm from the existing partners brings in some additional amount to compensate them for loss of their share in super profits. It is termed as his share of goodwill (also called premium). Alternatively he may agree that goodwill account be raised in the books of the firm by giving the necessary credit to the old partners. 

Thus, when a new partner is admitted, goodwill can be treated in two ways:

1. By Premium Method, and 

2. By Revaluation Method. 

Premium Method: This method is followed when the new partner pays his share of goodwill in cash. The amount of premium brought in by the new partner is shared by the existing partners in their ratio of sacrifice.

The important points which require attention at the time of admission of a new partner: 

• New profit sharing ratio; 

• Sacrificing ratio; 

• Valuation and adjustment of goodwill; 

• Revaluation of assets and Reassessment of liabilities; 

• Distribution of accumulated profits (reserves); and 

• Adjustment of partners capitals.

Old ratio = 2 : 1

New ratio = 2 : 1 : 1

X's sacrifice = \(\frac{2}{3} - \frac{2}{4} = \frac{8 - 6}{12} = \frac{2}{12}\)

Y's sacrifice = \(\frac{1}{3} - \frac{1}{4} = \frac{4-3}{12}= \frac{1}{12}\)

Sacrificing ratio Of X and Y = \(\frac{2}{12}:\frac{1}{12}= 2:1\)

Here old ratio and sacrificing ratio are the same.

Goodwill = super profit × 100/ Normal rate of return 

Super profit = Actual/Average profit – Normal profit 

Normal profit = Capital employed × Normal rate of return = 820000 × 10/100 = 82000 

Super profit = 100000 – 82000 = 18000 

Goodwill = 18000 × 100/10 = Rs. 180000.

1. Right to share the assets of the firm – For this the new partner has to bring a certain amount of capital.

2. Right to share the profits of the firm – For this he has to bring his share of goodwill.

Correct answer is (c) 1:1

The retiring or deceased partner is entitled to his share of goodwill at the time of retirement/ death because the goodwill has been earned by the firm with the efforts of all the existing partners. Hence, at the time of retirement/death of a partner, goodwill is valued as per agreement among the partners the retiring/ deceased partner compensated for his share of goodwill by the continuing partners (who have gained due to acquisition of share of profit from the retiring/ deceased partner) in their gaining ratio.

When goodwill does not appear in the books of the firm there are four ways in which the retiring partner can be given the necessary credit for loss of his share of goodwill, these are as follows:

(a) Goodwill is raised at its full value and retained in the books as such: In this case, Goodwill Account is debited will its full value and all the partner’s (including the retired/deceased partner) capital accounts are credited in the old profit sharing ratio. The full value of goodwill will appear in the balance sheet of the reconstituted firm.

(b) Goodwill is raised at it’s full value and written off immediately: If it decided that goodwill should not be refrained and shown in the balance sheet of the reconstituted firm then, after raising goodwill at its value by crediting all the partners’ capital accounts (including that of the retired/ deceased partners, it should be written off by debiting the remaining partners in their new profit sharing ratio and crediting the goodwill account with its full value.

(c) Goodwill is raised to the extent of retired/deceased partner’s share and written off immediately: In this case goodwill account is raised only to the extent of retired/ deceased partner’s share by debiting goodwill account with the proportionate amount and credited only to the retired/deceased partner’s capital account. Thereafter, the remaining partners capital accounts are debited in their gaining ratio and goodwill account/credited to write it off.

(d) No goodwill account is raised at all in firm’s books: If it is decided that the goodwill account should not appear in firm’s books at all, in that case it is adjusted discretely, through partners capital accounts.

If value of goodwill already appearing in the books of the firm equals with the current value of goodwill, normally no adjustment is required because goodwill stands credited in the accounts of all the partners including the retiring one.

It may be noted that in all the above situations, goodwill appears in the balance sheet at its full value. In case it is decided by the partners that it should be written-off, fully or partially.

Hidden Goodwill: If the firm has agreed to settle the retiring or deceased partner by paying him a lump sum amount, then the amount paid to him in excess of what is due to him based on the balance in his capital account after making necessary adjustments in respect of accumulated profits and losses and revaluation of assets and liabilities, etc. shall be treated as his share of goodwill (known as hidden goodwill).

Inclusion of a new partner into an existing firm is called admission of a partner. A new partner is admitted, when a firm needs more capital, managerial skill, etc.

The various accounting aspects involved on retirement or death of a partner are as follows: 

• Ascertainment of new profit sharing ratio and gaining ratio; 

• Treatment of goodwill; 

• Revaluation of assets and liabilities; 

• Adjustment in respect of unrecorded assets and liabilities; 

• Distribution of accumulated profits and losses; 

• Ascertainment of share of profit or loss up to the date of retirement/death; 

• Adjustment of capital, if required; 

• Settlement of the amounts due to retired/deceased partner;

Accumulated losses transferred to old partners capital a/c.

Average profit = Rs. 50,000 Normal rate of return = 10% 

Capitalised value of average profit = \(\frac{50,000 \times 100} {10}\) = Rs. 5,00,000 

Goodwill = Capitalised value of average profit - Total of net tangible assets. 

              = Rs. 5,00,000 – 3,00,000 = Rs. 2,00,000.

Share of Profit of Z = \(\frac{1}{6}\) 

Share of profit of X and Y = 1 –\(\frac{1}{6} = \frac{5}{6}\) 

Total capital of X & Y= 50,000+ 40,000 = 90,000 

Capital of X and Y for \(\frac{5}{6}\) share = 90,000 

∴ Total capital of X, Y and Z = 90,000× \(\frac{6}{5}\) = 1,08,000 

∴ Capital to be brought in by Z = 1,08,000 – 90,000 or 1,08,000 × \(\frac{1}{6}\) = 18,000.

Average profit = \(\frac{27,000+28,000+29,000}{3}\)= 28,000 

Goodwill = 2 yeas purchase of the average profit = 2 × 28,000 = 56,000.

(c) Gain to some partners and sacrifice to others.

At the time of the admission of a new partner, accounting adjustments are required on the following

1. Capital of the new partner

2. Ascertainment of profit sharing ratios – new and sacrificing 

3. Revaluation of assets and liabilities 

4. Adjustment of accumulated profits (including reserves) or losses. 

5. Calculation of goodwill 

6. Adjustment of capital accounts of partners.

Capital Exployed = Assets – Liabilities = (10,000 + 15,000 + 20,000 + 20,000) – 5,000 = 60,000 

Normal profit = Capital employed × Normal rate of return 60,000 × 10/100 = 6,000 

Actual profit = 5,500 

Super profit = Actual profit – Normal Prot = 5,500 – 6,000 = -500 Firm Y 

Capital Employed= (2,000 + 8,000 + 10,000 + 20,000) – 5,000 = 35,000 

Normal profit = 35.000 × 10/100 = 3,500 

Actual profit = 4,000 

Super profit = 4,000 – 3,500 = 500 

Conclusion: Firm ‘Y’ earns Rs. 4,000 which is above normal profit. 

Firm Y’s performance is better. So select Firm Y’.

Goodwill is the value of the reputation of a rm. As such it is an asset to the rm. But it is an intangible asset and is not visible.

Following are the important factors affecting the goodwill of a firm 

1. Nature of business -A firm producing goods having constant demand will have more goodwill. 

2. Suitable location – A firm which is situated in a favourable locality will have more goodwill. 

3. Efficiency of management – if the management of a firm is efficient, it will have high goodwill. 

4. Running period – a firm which is running for a long period of time, will have more goodwill. 

5. Requirement of capital – if a firm requires a lesser amount of capital, it will have high goodwill.

6. Market situation – if competition in the market is limited, it helps a rm to have more goodwill.

Old ratio = 5:3

Roshi's sacrifice of share = \(\frac{1}{5}\, of \, \frac{5}{8} = \frac{1}{5} \times \frac{5}{8}\) = \(\frac{5}{40}\)

Roshi's new share = \(\frac{5}{8} - \frac{5}{40} = \frac{25-5}{40} = \frac{20}{40}\)

Riya's sacrifice of share = \(\frac{1}{6} \,of\, \frac{3}{8} = \frac{1}{6} \times \frac{3}{8} = \frac{3}{48}\)

Riya's  new share = \(\frac{3}{8} - \frac{3}{48} = \frac{18-3}{48} = \frac{15}{48}\)

Riya's new share = \(\frac{3}{8} - \frac{3}{48} = \frac{18-3}{48} = \frac{15}{48}\)

Maria's share = \(\frac{5}{40} + \frac{3}{48} = \frac{30+15}{240} = \frac{45}{240}\)

New profit sharing ratio = \(\frac{20}{40} : \frac{6}{68} : \frac{45}{240} = \)\(\frac{120}{240} : \frac{30}{240} : \frac{45} {240}\)

= 120 : 75 : 45 = 8 : 5 : 3

 Amount of goodwill to be brought in by R 

= \(\frac{1}{6}\) of (50,000 – 25,000) 

= \(\frac{1}{6}\) of 25,000

= \(\frac{1}{6}\) × 25,000 

= Rs. 4,167

The Journal entry is

Correct answer is (c) Old ratio

The following are the common methods used for valuing good will 

1. Average profit method/simple average profit method. 

2. Super profit method 

3. capitalisation method. 

1. Average Profit method: Under this method, the goodwill is valued at agreed number of years purchase of the average profits of the past few years. Goodwill = Average profits × No. of years purchased.

Average profit = \( \frac{\text { Total profits }} {\text { No. of years }}\)

Weighted Average Profit method: Goodwill = weighted Average Profit × No. of years purchase. Weighted average is based on specified weights like 1, 2, 3, 4 for respective year’s profit.

2. Super profit Method: Under this method, goodwill is calculated by multiplying the super profit with the agreed number of years. 

Goodwill = Super Profit × No. of years purchase Super Profit = Actual or 

Average Profit – Normal Profit Normal profit = Capital employed × Normal Rate of Return 

Capital employed = Total Assets – Total Liabilities or outside liabilities

Average profit = \(\frac{\text { Total profits }} {\text { No. of years }}\)

3. Capitalisation Method: Under this method, the goodwill can be calculated in two ways 

• by capitalising the average profits. 
• by capitalising the super profits.

(i) Capitalisation of average profits 

Under this method, the value of goodwill is calculated by deducting the capital employed (net assets) in the business from the capitalized value of average profits on the basis of normal rate of return. 

Good will = capitalised value – capital employed (net asset) Capitalised value of average profit Average Profit × \(\frac{100}{\text { Normal Rate of Return }}\)

(ii) Capitalisation of Super Profits 

Under this method the goodwill can be ascer tained by capitalising the super profit directly. Goodwill = Super Profits x  \(\frac{100}{\text { Normal Rate of Return }}\)

Old Ratio = 1:1 C’s 

Share = 1/6 

Remaining portion = 1 – 1/6 = 5/6 

This 5/6 is to share among A & B in their old ratio.

So their new shares will be 

A’s share \(\frac{1}{2}\) of \(\frac{5}{6}\) = \(\frac{1}{2}\) × \(\frac{5}{6}\) = \(\frac{5}{12}\) 

B’s share  \(\frac{1}{2}\) of \(\frac{5}{6}\) =  \(\frac{1}{2}\) × \(\frac{5}{6}\) = \(\frac{5}{12}\) The new ratio between

A,B and C = \(\frac{5}{12}\) : \(\frac{5}{12}\) : \(\frac{2}{12}\)

Sacrificing ratio = Old ratio - New ratio

A's Sacrifice = \(\frac{1}{2} -\frac{5}{12} = \frac{6-5}{12} = \frac{1}{12}\)

B's Sacrifice = \( \frac{1}{2}- \frac{5}{6} = \frac{6-5}{12} = \frac{1}{12}\)

Sacrificing ratio = \(\frac{1}{12} : \frac{1}{12}\) = 1 : 1

Old ratio and sacrificing ratio are the same here.

Under premium method, the new partner brings his share of goodwill in cash. The amount so brought in by him is shared among the old partners in the sacrificing ratio. 

The journal entries here are:

1. Cash a/c Dr. To premium for goodwill a/c (cash brought in by the new partner for goodwill)

2. Premium for good will a/c To old partners capital a/c (Goodwill shared among the old partners)

“If the amount of premium is paid privately to the old partners, no need of entering the same in the books.”

(b) Sacrificing ratio

(c) Capitalization of average profit method.

When an incoming partner brings his share of goodwill in kind (as assets), the assets account will be debited. Credit is given to premium for good will account with the share of goodwill and new partner’s capital account with the share of capital. 

The journal entries here are:

1. Assets a/c Dr. 

   To New partner’s Capital A/c 

   To Premium (goodwill) A/c (Assets brought in by the new Partner) 

2. New partners’ capital a/c Dr. 

     To Sacrificing partners Capital A/c (Share of goodwill brought in by the new partner transferred to old partners capital).

(i) Super profit = Value of goodwill /Number of years purchase

 = (180000/2)  = 90000

 (ii) Normal Profit = Capital employed X Normal rate of return /100

= (1000000 X 15/ 100) = 150000

(iii) Average Profit = Normal Profit + Super profit

= 150000 + 90000 = 240000