CUET UG Accountancy Booster Test 2 Valuation of Goodwill -

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CUET UG Accountancy Booster Test 2 Valuation of Goodwill

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Valuation of Goodwill

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QUESTION 1 OF 20

In the average profits method, why might a simple average be deemed conceptually insufficient for a firm with rapidly growing earnings?

Answer Review

1 In the average profits method, why might a simple average be deemed conceptually insufficient for a firm with rapidly growing earnings?

A It overvalues the most recent profits.

B It completely ignores the earliest years.

C It only applies to firms currently incurring losses.

D It fails to give higher weightage to the recent trend of increased profitability.

💡 Short Explanation

Simple average treats equally. Growing firms need weighting. Recent profits become more relevant.

✅ Correct Answer Explanation

Simple average ignores trends and gives equal importance to all years. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No overvaluation occurs.
Option B → Early years included equally.
Option C → Applicable to profitable firms too.

🎯 Strategy

Used

Conceptual Understanding

Application:

Compare simple and weighted averages.

Final Logic:

Trend consideration requires weighting.

🧠 Memory Trick

"Growth Needs Weight"

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

2 A firm had profits of Rs. 10,000, Rs. 15,000, Rs. 4,000, a loss of (Rs. 5,000), and Rs. 6,000. Goodwill is exactly 3 years' purchase of the average profit. What is the goodwill?

A Rs. 18,000

B Rs. 30,000

C Rs. 6,000

D Rs. 15,000

💡 Short Explanation

Total profits calculated first. Average profit determined. Years purchase applied.

✅ Correct Answer Explanation

Total Profit: 10000 + 15000 + 4000 − 5000 + 6000 = 30000 Average Profit: 30000 ÷ 5 = 6000 Goodwill: 6000 × 3 = 18000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Total profit confusion.
Option C → Average only.
Option D → Wrong multiplication.

🎯 Strategy

Used

Average Profit Method

Application:

Average Profit × Years Purchase.

Final Logic:

Goodwill equals Rs. 18,000.

🧠 Memory Trick

"Average × Years"

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

3 If the total adjusted profit over 5 years is Rs. 21,93,000, and 4 years' purchase is applied to the simple average, what is the goodwill amount?

A Rs. 4,38,600

B Rs. 17,54,400

C Rs. 21,93,000

D Rs. 87,72,000

💡 Short Explanation

Average profit calculated first. Multiply by years purchase. Goodwill obtained.

✅ Correct Answer Explanation

Average Profit: 2193000 ÷ 5 = 438600 Goodwill: 438600 × 4 = 1754400 Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Average only.
Option C → Total profit only.
Option D → Wrong multiplication.

🎯 Strategy

Used

Simple Average Method

Application:

Total Profit ÷ Years × Purchase.

Final Logic:

Goodwill equals Rs. 17,54,400.

🧠 Memory Trick

"Average Then Multiply"

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

4 If a major plant repair of Rs. 6,000 was mistakenly charged to revenue instead of being capitalised, how does this formulaically affect the past profit calculation for a simple average?

A It requires deducting Rs. 6,000 from that year's profit.

B It does not affect the simple average profit calculation.

C It requires adding Rs. 6,000 back to the profit and adjusting for corresponding depreciation.

D It requires adding Rs. 6,000 without any depreciation adjustment whatsoever.

💡 Short Explanation

Capital expenditure wrongly treated. Profit understated initially. Depreciation adjustment required.

✅ Correct Answer Explanation

Capital items should not reduce revenue profit directly; only depreciation should affect profits. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Wrong treatment.
Option B → Adjustment necessary.
Option D → Depreciation ignored incorrectly.

🎯 Strategy

Used

Error Rectification Logic

Application:

Correct revenue-capital mistake.

Final Logic:

Capitalize and depreciate properly.

🧠 Memory Trick

"Add Back, Then Depreciate"

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

5 If profits for 2012 to 2015 are assigned weights 1 to 4, and 2013 has an overvalued closing stock of Rs. 2,400, how must this error be treated conceptually before assigning weights?

A Added to 2013 profit only.

B Deducted from 2012 profit.

C Deducted from 2013 profit and added to 2014 profit as an opening stock adjustment.

D Completely ignored in weighted average calculations.

💡 Short Explanation

Closing stock overvaluation corrected. Current year profit reduced. Next year opening stock adjusted.

✅ Correct Answer Explanation

Overvalued closing stock inflates one year and affects next year's opening stock. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Opening stock effect ignored.
Option B → Wrong year affected.
Option D → Error cannot be ignored.

🎯 Strategy

Used

Stock Error Analysis

Application:

Correct stock valuation impact.

Final Logic:

Both years affected.

🧠 Memory Trick

"Closing Stock Affects Two Years"

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

6 Which statements are technically true regarding trend considerations?
1. Weighting is strictly mandatory by law if profits rise.
2. Weighted average is based on the assumption that early years represent the future better than recent years.

A Only 1

B Only 2

C Both 1 and 2

D Neither 1 nor 2

💡 Short Explanation

Weighting not legally compulsory. Recent years more relevant. Both statements false.

✅ Correct Answer Explanation

Weighted average is optional and emphasizes recent years, not earlier years. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 1 false.
Option B → Statement 2 false.
Option C → Both incorrect.

🎯 Strategy

Used

Statement Evaluation

Application:

Assess weighted average principles.

Final Logic:

Recent trends matter most.

🧠 Memory Trick

"Recent Years Predict Future"

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

7 Assertion (A): Normal Profit is a hypothetical benchmark representing standard industry returns based on capital.
Reason (R): Super profit conceptually exists only when actual earnings exceed this hypothetical normal return.

A Both A and R are true, and R explains A.

B Both A and R are true, but R does not explain A.

C A is true, R is false.

D A is false, R is true.

💡 Short Explanation

Normal profit means standard return. Super profit exceeds benchmark. Reason explains assertion.

✅ Correct Answer Explanation

Super profit exists only when actual earnings exceed normal expected returns. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Reason directly explains.
Option C → Reason true.
Option D → Assertion true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Compare normal and super profits.

Final Logic:

Benchmark defines excess profit.

🧠 Memory Trick

"Super Profit = Above Normal"

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

8 Match the mathematical operations used in super profit valuation:

List 1	List 2
1. Normal Profit	d. Capital × Normal Rate / 100
2. Super Profit	a. Average Profit - Normal Profit
3. Capital Employed	c. Total Assets - Outside Liabilities
4. Goodwill	b. Super Profit × Years Purchase

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

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

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

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

💡 Short Explanation

Normal profit uses rate. Super profit means excess. Goodwill based on purchase years.

✅ Correct Answer Explanation

Correct matching: Normal Profit → Capital × Rate Super Profit → Average − Normal Capital Employed → Assets − Liabilities Goodwill → Super Profit × Years Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill mismatch.
Option C → Incorrect sequence.
Option D → Wrong formulas.

🎯 Strategy

Used

Formula Matching

Application:

Match each valuation concept.

Final Logic:

Only Option B correct.

🧠 Memory Trick

"Normal → Excess → Purchase"

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

9 Arrange the sequential calculation of Super Profit starting from capital:
1. Ascertain Firm's Capital Base.
2. Apply Normal Rate to compute Normal Profit.
3. Deduct Normal Profit from Average Profit.

A 1, 2, 3

B 2, 3, 1

C 3, 1, 2

D 1, 3, 2

💡 Short Explanation

Capital base found first. Normal profit computed next. Super profit determined finally.

✅ Correct Answer Explanation

Correct order: Determine capital Apply normal rate Compare with average profit Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Capital needed first.
Option C → Deduction too early.
Option D → Wrong sequence.

🎯 Strategy

Used

Sequential Logic

Application:

Arrange super profit calculation.

Final Logic:

Normal profit precedes super profit.

🧠 Memory Trick

"Capital → Normal → Super"

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

10 A Firm's capital = Rs. 5,00,000, Normal Rate = 10%. Average profits for 5 years = Rs. 60,000. What is 3 years' purchase of Super Profit?

A Rs. 10,000

B Rs. 50,000

C Rs. 60,000

D Rs. 30,000

💡 Short Explanation

Normal profit calculated first. Super profit derived. Multiply by years purchase.

✅ Correct Answer Explanation

Normal Profit: 500000 × 10/100 = 50000 Super Profit: 60000 − 50000 = 10000 Goodwill: 10000 × 3 = 30000 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Super profit only.
Option B → Incorrect multiplication.
Option C → Average profit only.

🎯 Strategy

Used

Super Profit Method

Application:

Actual − Normal × Years.

Final Logic:

Goodwill equals Rs. 30,000.

🧠 Memory Trick

"Excess Profit × Years"

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

11 What is the mathematical conclusion if the formula (Actual Average Profit - Normal Profit) results in a negative figure?

A Goodwill is highly valued due to tax shields.

B The firm has no goodwill (no super profit).

C Capital must be artificially added to the result.

D The normal rate of return is too low.

💡 Short Explanation

Actual profits below normal. No excess earning exists. Goodwill absent.

✅ Correct Answer Explanation

Negative super profit means the firm fails to earn above normal return. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Tax shields irrelevant.
Option C → Artificial addition incorrect.
Option D → Rate may still be valid.

🎯 Strategy

Used

Formula Interpretation

Application:

Analyze negative super profit.

Final Logic:

No super profit means no goodwill.

🧠 Memory Trick

"Negative Super Profit = No Goodwill"

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

12 The "number of years' purchase" multiplier in the super profit method conceptually represents:

A The physical age of the partnership.

B The time taken to pay off the firm's external liabilities.

C The expected number of years the benefit of super profits will continue.

D The duration of the normal rate of return.

💡 Short Explanation

Future benefit estimated. Super profits continue temporarily. Years purchase measures duration.

✅ Correct Answer Explanation

Years purchase reflects expected continuation of excess profits. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Firm age irrelevant.
Option B → Liabilities unrelated.
Option D → NRR duration irrelevant.

🎯 Strategy

Used

Concept Interpretation

Application:

Understand years purchase purpose.

Final Logic:

Future earning duration measured.

🧠 Memory Trick

"Years Purchase = Future Benefit Years"

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

13 Consider these statements about Capitalisation of Average Profit:
1. It conceptually ascertains the required capital to earn the current average profit normally.
2. Goodwill is the excess of this required capital over the actual capital employed.

A Only 1 is true

B Only 2 is true

C Both 1 and 2 are true

D Both 1 and 2 are false

💡 Short Explanation

Capitalized value first determined. Actual capital compared. Excess equals goodwill.

✅ Correct Answer Explanation

Capitalisation method determines capital required to earn average profits normally. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement 2 also true.
Option B → Statement 1 true.
Option D → Both correct.

🎯 Strategy

Used

Statement Verification

Application:

Evaluate capitalization method.

Final Logic:

Goodwill equals excess capitalized value.

🧠 Memory Trick

"Required Capital − Actual Capital"

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

14 Assertion (A): The final goodwill amount calculated by capitalising super profits differs significantly from capitalising average profits.
Reason (R): Goodwill under capitalisation of super profits = Super Profits × (100 / Normal Rate).

A Both A and R are true.

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

Both methods give same result. Formula correctly stated. Assertion incorrect.

✅ Correct Answer Explanation

Capitalising average profits and super profits mathematically produce the same 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

Method Comparison

Application:

Compare capitalization approaches.

Final Logic:

Formula correct, conclusion wrong.

🧠 Memory Trick

"Different Process, Same Goodwill"

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

15 Average profits = Rs. 12,000, Normal rate = 8%, Net Assets = Rs. 1,00,000. What is goodwill mathematically calculated by capitalising super profits?

A Rs. 50,000

B Rs. 12,000

C Rs. 1,50,000

D Rs. 1,00,000

💡 Short Explanation

Normal profit calculated first. Super profit derived. Capitalized thereafter.

✅ Correct Answer Explanation

Normal Profit: 100000 × 8/100 = 8000 Super Profit: 12000 − 8000 = 4000 Goodwill: 4000 × 100/8 = 50000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Average profit only.
Option C → Incorrect capitalization.
Option D → Net assets only.

🎯 Strategy

Used

Super Profit Capitalisation

Application:

Super Profit × 100/NRR.

Final Logic:

Goodwill equals Rs. 50,000.

🧠 Memory Trick

"Super Profit × 100/Rate"

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

16 If a business has net assets of Rs. 8,20,000 and the capitalised value of its average profit is exactly Rs. 8,20,000, what is the conceptual interpretation?

A The firm has negative goodwill.

B The firm has exceptionally high goodwill.

C The firm earns high super profits.

D The firm earns exactly normal profits, thus no goodwill.

💡 Short Explanation

Capitalized value equals net assets. No excess earning exists. Goodwill absent.

✅ Correct Answer Explanation

When capitalized value equals actual capital, super profit becomes zero. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No negative goodwill here.
Option B → No excess value exists.
Option C → Super profits absent.

🎯 Strategy

Used

Net Asset Comparison

Application:

Compare business value and capital.

Final Logic:

Equal values imply normal profit.

🧠 Memory Trick

"Equal Values = No Goodwill"

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

17 Why are fictitious assets excluded when calculating total net assets for goodwill valuation?

A They are completely intangible.

B They generate immediate cash.

C They represent physical properties.

D They do not represent real realizable value contributing to capital employed.

💡 Short Explanation

Fictitious assets unreal. No realizable value exists. Excluded from capital employed.

✅ Correct Answer Explanation

Fictitious assets do not contribute to actual business capital. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Intangible alone not reason.
Option B → No cash generation.
Option C → Not physical properties.

🎯 Strategy

Used

Asset Classification

Application:

Identify real versus fictitious assets.

Final Logic:

Only realizable assets counted.

🧠 Memory Trick

"Fictitious Assets Are Unreal"

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

18 Arrange the steps for adjusting Net Assets if an unrecorded liability is discovered during reconstitution:
1. Identify the unrecorded liability.
2. Revalue the liability (Debit Revaluation, Credit Liability).
3. Deduct the updated total liabilities from total assets.

A 1, 2, 3

B 3, 2, 1

C 2, 1, 3

D 1, 3, 2

💡 Short Explanation

Liability identified first. Revaluation entry passed next. Net assets adjusted finally.

✅ Correct Answer Explanation

Correct order: Identify liability Record adjustment Deduct liabilities from assets Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Reverse order incorrect.
Option C → Adjustment before identification impossible.
Option D → Deduction before revaluation incorrect.

🎯 Strategy

Used

Sequential Accounting Logic

Application:

Arrange revaluation process correctly.

Final Logic:

Identification precedes adjustment.

🧠 Memory Trick

"Identify → Revalue → Deduct"

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

19 According to the passage, what should partners do due to the different values yielded by different goodwill methods?

A Always use the Average Profits method without consultation.

B Specifically decide the calculation method among themselves.

C Average the results of all mathematical methods.

D Ignore the concept of goodwill entirely.

💡 Short Explanation

Different methods vary. Mutual agreement necessary. Partners choose method jointly.

✅ Correct Answer Explanation

The passage states that partners should mutually agree on the goodwill valuation method. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → No compulsory method.
Option C → Averaging unnecessary.
Option D → Goodwill remains important.

🎯 Strategy

Used

Passage Interpretation

Application:

Identify recommended action.

Final Logic:

Agreement avoids disputes.

🧠 Memory Trick

"Partners Decide Method"

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

20 Which two methods will logically yield exactly the same mathematical final goodwill value according to the text?

A Simple Average Method and Weighted Average Method

B Average Profits Method and Super Profits Method

C Capitalising super profits and capitalising average profits

D Weighted Average Method and Capitalisation of super profits

💡 Short Explanation

Both capitalization methods linked. Same final goodwill obtained. Different approaches only.

✅ Correct Answer Explanation

The passage clearly states both capitalization methods yield identical goodwill values. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Different outcomes possible.
Option B → General methods differ.
Option D → Weighted average unrelated.

🎯 Strategy

Used

Passage-Based Comparison

Application:

Compare capitalization methods.

Final Logic:

Mathematical equivalence exists.

🧠 Memory Trick

"Capitalisation Methods Match"

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

CUET UG Accountancy Booster Test 2 Valuation of Goodwill

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