CUET UG Accountancy Booster Test 2 Goodwill Concepts -

🚀

CUET UG Accountancy Booster Test 2 Goodwill Concepts

⏱️ 30 Minutes

❓ 20 Questions

📌 Answers are locked once submitted — results and explanations appear at the end.

CUET UG Accountancy Booster Test 2 Goodwill Concepts

1 / 20

QUESTION 1 OF 20

Assertion (A): Goodwill is the present value of a firm's anticipated excess earnings.
Reason (R): Goodwill places the buyer in a position to earn normal profits comparable to newly established firms.

Answer Review

1 Assertion (A): Goodwill is the present value of a firm's anticipated excess earnings.
Reason (R): Goodwill places the buyer in a position to earn normal profits comparable to newly established firms.

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

B Both A and R are true, but R is not the correct explanation of A.

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

Goodwill means excess earning power. Normal profit not sufficient. Reason contradicts concept.

✅ Correct Answer Explanation

Goodwill represents anticipated excess earnings above normal profits, not merely normal profits. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Reason false.
Option B → Reason incorrect.
Option D → Assertion true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

�� Differentiate excess and normal profits.

Final Logic:

�� Goodwill depends on super profits.

🧠 Memory Trick

"Goodwill = Excess Earnings"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Definition of Goodwill – Page reference may vary by edition.

2 As per Accounting Standard 26, which of the following statements regarding the intangible nature of goodwill are correct?
I. Internally generated goodwill should be recognized as an asset and amortized over 10 years.
II. Purchased goodwill may be accounted for in the books and shown as an asset.
III. If an intangible asset does not satisfy recognition criteria, it should be expensed.

A I and II only

B I and III only

C I, II, and III

D II and III only

💡 Short Explanation

Purchased goodwill recognized. Self-generated goodwill not recorded. Unrecognized items expensed.

✅ Correct Answer Explanation

AS-26 permits purchased goodwill but disallows internally generated goodwill as an asset. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement I false.
Option B → Statement I incorrect.
Option C → All statements not true.

🎯 Strategy

Used

Accounting Standard Application

Application:

�� Apply AS-26 rules.

Final Logic:

�� Purchased goodwill alone recognized.

🧠 Memory Trick

"Purchased Yes, Self-generated No"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Intangible Asset Nature – Page reference may vary by edition.

3 What essentially drives the "reputation value" of a firm into a quantifiable accounting figure when it is reconstituted?

A The differential profit capacity allowing it to earn above the normal rate of return.

B The total sum of its physical assets minus external liabilities.

C The amount of accumulated reserves divided by the number of partners.

D The physical location of its headquarters alone.

💡 Short Explanation

Reputation creates excess profits. Above-normal returns matter. Differential earning capacity valued.

✅ Correct Answer Explanation

Goodwill becomes measurable because the firm earns super profits above normal return. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Net assets only.
Option C → Reserves unrelated.
Option D → Location alone insufficient.

🎯 Strategy

Used

Conceptual Understanding

Application:

�� Link reputation with super profit.

Final Logic:

�� Excess earning power creates goodwill.

🧠 Memory Trick

"Reputation Creates Super Profit"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Reputation Value – Page reference may vary by edition.

4 A firm's capital is Rs. 1,00,000 and the normal rate of return is 15%. Annual salary to partners is Rs. 12,000. Average profits for 3 years are Rs. 36,000. What is the goodwill at 2 years' purchase of super profits?

A Rs. 21,000

B Rs. 18,000

C Rs. 9,000

D Rs. 27,000

💡 Short Explanation

Normal profit calculated first. Super profit determined next. Years purchase applied.

✅ Correct Answer Explanation

Normal Profit: 100000 × 15/100 = 15000 Add Salary: 15000 + 12000 = 27000 Super Profit: 36000 − 27000 = 9000 Goodwill: 9000 × 2 = 18000 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Wrong multiplication.
Option C → Only super profit.
Option D → Normal profit confusion.

🎯 Strategy

Used

Super Profit Method

Application:

�� Average Profit − Normal Profit.

Final Logic:

�� Goodwill equals Rs. 18,000.

🧠 Memory Trick

"Super Profit × Years Purchase"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Super Profit Basis – Page reference may vary by edition.

5 Why does the incoming partner pay a premium for goodwill?

A To acquire a physical stake in the firm's unrecorded assets.

B To pay off the personal debts of the retiring partners.

C To compensate the sacrificing partners for the loss of their share in the firm's expected future super profits.

D To cover the management costs of the upcoming accounting year.

💡 Short Explanation

Old partners sacrifice profits. Compensation becomes necessary. Future super profits shared.

✅ Correct Answer Explanation

Premium for goodwill compensates old partners for loss of future earning advantage. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Physical assets unrelated.
Option B → Personal debts irrelevant.
Option D → Management costs unrelated.

🎯 Strategy

Used

Theory Application

Application:

�� Identify purpose of goodwill premium.

Final Logic:

�� Compensation protects sacrificing partners.

🧠 Memory Trick

"Goodwill Compensates Sacrifice"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Future Earning Capacity – Page reference may vary by edition.

6 Two identical factories produce the same output, but Factory A has long-term supply contracts and stable demand, resulting in super profits. Factory B earns only normal profits. If a new partner joins Factory B, how much premium for goodwill should they bring?

A An amount equal to Factory A's goodwill.

B Half of the total capital employed.

C A sum based on the average profit of the industry.

D Zero, because Factory B has no competitive advantage causing super profits.

💡 Short Explanation

No super profit exists. Normal profits only earned. Goodwill therefore absent.

✅ Correct Answer Explanation

Goodwill arises only when profits exceed normal returns. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill differs by advantage.
Option B → Capital unrelated.
Option C → Industry average insufficient.

🎯 Strategy

Used

Comparative Analysis

Application:

�� Compare normal and super profits.

Final Logic:

�� No competitive advantage means no goodwill.

🧠 Memory Trick

"No Super Profit = No Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Competitive Advantage – Page reference may vary by edition.

7 A firm's goodwill is highly valued because it manufactures unique, patented electronic chips with stable demand. Which foundational factor is primarily contributing to this valuation?

A Nature of business and special advantages.

B Purely the efficiency of management.

C Centralised physical location factor.

D Accumulated past losses.

💡 Short Explanation

Patents create uniqueness. Stable demand increases profits. Special advantages raise goodwill.

✅ Correct Answer Explanation

Unique patented products create strong earning capacity and goodwill. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Management alone insufficient.
Option C → Location not main factor.
Option D → Losses reduce goodwill.

🎯 Strategy

Used

Factor Identification

Application:

�� Identify goodwill-enhancing feature.

Final Logic:

�� Patents create competitive advantage.

🧠 Memory Trick

"Patents Increase Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Nature of Business – Page reference may vary by edition.

8 Arrange the following logical steps demonstrating how location affects goodwill:
I. Higher sales volumes are achieved.
II. A business is set up in a centrally located, heavy traffic area.
III. Higher profits translate to anticipated excess earnings (Goodwill).
IV. Cost of customer acquisition decreases due to visibility.

A IV, III, I, II

B II, IV, I, III

C I, II, III, IV

D II, I, IV, III

💡 Short Explanation

Good location improves visibility. Customers increase naturally. Higher profits create goodwill.

✅ Correct Answer Explanation

Correct sequence: Central location Better visibility Higher sales Increased goodwill Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Reverse order.
Option C → Location should come first.
Option D → Visibility logically precedes sales.

🎯 Strategy

Used

Sequential Logic

Application:

�� Trace effect of location.

Final Logic:

�� Good location drives excess earnings.

🧠 Memory Trick

"Location → Visibility → Sales → Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Location Factor – Page reference may vary by edition.

9 Match the following concepts regarding goodwill and its accounting treatment:

List 1	List 2
1. Efficiency of management	a. Leads to high productivity and cost efficiency
2. Purchased goodwill	b. May be accounted for in the books and written off
3. Self-generated goodwill	c. Not recognized as an asset under AS 26
4. Fictitious asset	d. Excluded from firm's capital for normal profit calculation

A 1-b, 2-d, 3-a, 4-c

B 1-d, 2-b, 3-c, 4-a

C 1-c, 2-d, 3-b, 4-a

D 1-a, 2-c, 3-d, 4-b

💡 Short Explanation

Efficient management boosts productivity. Purchased goodwill recorded. Self-generated goodwill not recognized.

✅ Correct Answer Explanation

Correct matching: Efficiency → Productivity Purchased goodwill → Recorded in books Self-generated goodwill → Not recognized Fictitious assets → Excluded Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Incorrect matching.
Option B → Purchased goodwill mismatch.
Option D → Multiple errors.

🎯 Strategy

Used

Matching Logic

Application:

�� Match accounting concepts correctly.

Final Logic:

�� Only Option C fully correct.

🧠 Memory Trick

"Purchased Recorded, Self-generated Ignored"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Efficiency of Management – Page reference may vary by edition.

10 When calculating the weighted average profit to assess management's productivity impact over recent years, why are higher weights typically assigned to recent years?

A Because recent years' profits more accurately reflect the current efficiency and future earning trend.

B Because past years' data are generally considered fictitious.

C Because AS-26 mandates reverse chronological weighting.

D Because new partners only buy shares in the most recent year's profit.

💡 Short Explanation

Recent performance more relevant. Current efficiency emphasized. Future trend predicted better.

✅ Correct Answer Explanation

Weighted average method gives importance to recent profitability trends. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Past data not fictitious.
Option C → AS-26 unrelated.
Option D → Incorrect concept.

🎯 Strategy

Used

Method Interpretation

Application:

�� Understand weighted average logic.

Final Logic:

�� Recent years predict future better.

🧠 Memory Trick

"Recent Years Matter More"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Productivity Impact – Page reference may vary by edition.

11 If the level of competition suddenly increases, driving the anticipated "Average Profits" down to equal the "Normal Profits", what is the mathematical result for the Super Profits multiplier?

A Multiplier becomes infinite.

B Super profit becomes negative, requiring partner capital withdrawal.

C Goodwill equals the Total Capital multiplied by Normal Rate of Return.

D Super Profits become zero, resulting in zero goodwill regardless of years' purchase.

💡 Short Explanation

Average equals normal profit. Super profit disappears. Goodwill becomes zero.

✅ Correct Answer Explanation

Super Profit = Average Profit − Normal Profit If both are equal, super profit is zero. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No infinity involved.
Option B → Zero, not negative.
Option C → Incorrect formula.

🎯 Strategy

Used

Formula Application

Application:

�� Compare average and normal profits.

Final Logic:

�� No excess means no goodwill.

🧠 Memory Trick

"Equal Profits = Zero Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Competition Level – Page reference may vary by edition.

12 Assertion (A): A monopoly condition invariably eliminates the need for calculating normal profits in goodwill valuation.
Reason (R): A monopoly allows a firm to earn high profits, which leads to a higher value of goodwill.

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

B A is false, but R is true.

C A is true, but R is false.

D Both A and R are false.

💡 Short Explanation

Monopoly increases profits. Normal profit still necessary. Assertion incorrect.

✅ Correct Answer Explanation

Even monopoly firms require comparison with normal profits to calculate goodwill. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Assertion false.
Option C → Reason true.
Option D → Reason not false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

�� Evaluate monopoly effect carefully.

Final Logic:

�� Monopoly raises goodwill but not valuation rules.

🧠 Memory Trick

"Monopoly Raises Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Monopoly Advantage – Page reference may vary by edition.

13 Which of the following special advantages must be present to potentially increase a firm's goodwill?
I. Favourable import licenses
II. Low rate and assured supply of electricity
III. Constant change in profit-sharing ratio without new capital

A I and II only

B II and III only

C I and III only

D I, II, and III

💡 Short Explanation

Licenses create advantage. Cheap electricity reduces cost. Ratio changes irrelevant.

✅ Correct Answer Explanation

Special operational advantages improve profitability and goodwill. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Statement III false.
Option C → Statement II true.
Option D → All statements not valid.

🎯 Strategy

Used

Statement Evaluation

Application:

�� Identify genuine business advantages.

Final Logic:

�� Operational benefits raise goodwill.

🧠 Memory Trick

"Special Rights Increase Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Licenses and Rights – Page reference may vary by edition.

14 When a firm possesses well-known collaborators and patents, how does this theoretically interact with the Capitalisation of Super Profits method?

A It increases the outside liabilities deducted from total assets.

B It requires the patents to be expensed entirely in the year of admission.

C It elevates the firm's average actual profits above the normal return, thereby creating a positive super profit to be capitalized.

D It forces the firm to use the Average Profits method instead.

💡 Short Explanation

Patents increase profitability. Excess returns generated. Super profits capitalized.

✅ Correct Answer Explanation

Special advantages raise actual profits above normal profits. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Liabilities unaffected.
Option B → Patents not necessarily expensed.
Option D → No compulsory method.

🎯 Strategy

Used

Method Application

Application:

�� Connect patents with super profit.

Final Logic:

�� Competitive advantages create goodwill.

🧠 Memory Trick

"Patents Create Super Profit"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Contracts and Patents – Page reference may vary by edition.

15 A and B are partners with capitals of Rs. 45,000 each. C is admitted for a 1/3 share and brings Rs. 60,000 as capital. What is the value of the "hidden goodwill" of the firm?

A Rs. 60,000

B Rs. 30,000

C Rs. 1,80,000

D Rs. 1,50,000

💡 Short Explanation

Total implied capital determined. Actual capital compared. Difference equals goodwill.

✅ Correct Answer Explanation

Total Firm Capital: 60000 × 3 = 180000 Actual Capital: 45000 + 45000 + 60000 = 150000 Hidden Goodwill: 180000 − 150000 = 30000 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Incoming capital only.
Option C → Total capital value.
Option D → Incorrect subtraction.

🎯 Strategy

Used

Hidden Goodwill Method

Application:

�� Compare implied and actual capital.

Final Logic:

�� Difference equals goodwill.

🧠 Memory Trick

"Implied Capital − Actual Capital"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Admission Cases – Page reference may vary by edition.

16 A, B, and C share profits in the ratio of 8:5:3. They decide to change their ratio to 5:6:5. What is the sacrifice or gain of Partner A?

A Gains 1/16

B Sacrifices 5/16

C Gains 3/16

D Sacrifices 3/16

💡 Short Explanation

Compare old and new share. Reduction means sacrifice. Fraction carefully determined.

✅ Correct Answer Explanation

Old Share: 8/16 New Share: 5/16 Sacrifice: 8/16 − 5/16 = 3/16 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Partner loses share.
Option B → Wrong subtraction.
Option C → No gain occurs.

🎯 Strategy

Used

Old Minus New Method

Application:

�� Compare profit shares.

Final Logic:

�� A sacrifices 3/16.

🧠 Memory Trick

"Old Share − New Share"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Change in Ratio – Page reference may vary by edition.

17 When a partner retires, how is their share of goodwill conceptually treated compared to an admission scenario?

A It is ignored since they are leaving the firm.

B The retiring partner must pay the continuing partners for leaving.

C The continuing partners compensate the retiring partner for sacrificing their share in future super profits.

D The entire firm's goodwill is immediately sold for cash.

💡 Short Explanation

Retiring partner loses future profit. Continuing partners gain share. Compensation becomes necessary.

✅ Correct Answer Explanation

Retiring partners are compensated because remaining partners gain their share of goodwill. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill adjustment required.
Option B → Reverse treatment incorrect.
Option D → Goodwill not compulsorily sold.

🎯 Strategy

Used

Comparative Understanding

Application:

�� Compare retirement and admission.

Final Logic:

�� Gaining partners compensate retiring partner.

🧠 Memory Trick

"Retirement → Compensation"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Retirement Cases – Page reference may vary by edition.

18 If a firm is dissolved but the business is NOT sold as a going concern, what happens to the need for goodwill valuation?

A There is no need for valuation as the business operations cease and future excess earnings will not exist.

B Goodwill is calculated and distributed among creditors.

C It must be valued using the capitalization method only.

D It is transferred to a hidden goodwill account.

💡 Short Explanation

Business operations stop. Future profits disappear. Goodwill becomes irrelevant.

✅ Correct Answer Explanation

Goodwill exists only for a continuing business capable of future excess earnings. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Creditors not entitled.
Option C → No valuation required.
Option D → Hidden goodwill unnecessary.

🎯 Strategy

Used

Conceptual Understanding

Application:

�� Relate goodwill with continuity.

Final Logic:

�� No going concern means no goodwill.

🧠 Memory Trick

"No Business Continuity = No Goodwill"

📚 Category 10: Methods Overview Passage Read the following passage carefully to answer the next question: "Under the capitalisation method, goodwill can be calculated in two ways: (a) by capitalizing the average profits, or (b) by capitalising the super profits. Under Capitalisation of Average Profits, the value of goodwill is ascertained by deducting the actual firm's capital in the business from the capitalized value of the average profits on the basis of the normal rate of return. Under Capitalisation of Super profits, goodwill is the capitalised value of super profits, ascertained by multiplying super profits by 100/Normal Rate of Return."

19 A business earns average profits of Rs. 1,00,000. The normal rate of return is 10%. The value of net assets (actual capital) is Rs. 8,20,000. Using the capitalisation of average profits method, what is the value of goodwill?

A Rs. 10,00,000

B Rs. 1,80,000

C Rs. 82,000

D Rs. 18,000

💡 Short Explanation

Capitalized value calculated first. Net assets deducted next. Difference equals goodwill.

✅ Correct Answer Explanation

Capitalized Value: (100000 × 100) ÷ 10 = 1000000 Goodwill: 1000000 − 820000 = 180000 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Capitalized value only.
Option C → Incorrect subtraction.
Option D → Wrong calculation.

🎯 Strategy

Used

Capitalisation of Average Profit Method

Application:

�� Deduct actual capital from capitalized value.

Final Logic:

�� Goodwill equals Rs. 1,80,000.

🧠 Memory Trick

"Capitalized Value − Actual Capital"

20 Based on the passage, if you calculate goodwill using the Capitalisation of Average Profits method, how will the result compare to using the Capitalisation of Super Profits method for the same firm?

A It will be significantly higher because average profits are higher than super profits.

B It will be lower because actual capital is deducted.

C It will be different, requiring the partners to agree on which to use.

D The amount of goodwill worked out by both methods will be exactly the same.

💡 Short Explanation

Both methods mathematically linked. Final goodwill identical. Different approaches only.

✅ Correct Answer Explanation

Both capitalisation methods ultimately produce the same goodwill amount. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No significant increase.
Option B → Final result remains same.
Option C → Mathematical equivalence exists.

🎯 Strategy

Used

Method Comparison

Application:

�� Compare both valuation approaches.

Final Logic:

�� Same goodwill achieved mathematically.

🧠 Memory Trick

"Different Methods, Same Goodwill"

📚 Class XII – Accountancy Part 1 – Chapter: Reconstitution of a Partnership Firm – Admission of a Partner – Topic: Selection of Method – Page reference may vary by edition.

CUET UG Accountancy Booster Test 2 Goodwill Concepts

Test Complete!

Answer Review