CUET UG Accountancy Booster Test 1 Goodwill Concepts -

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CUET UG Accountancy Booster Test 1 Goodwill Concepts

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Goodwill Concepts

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QUESTION 1 OF 20

Which phrase best summarizes the accounting definition of goodwill as "the capitalised value attached to the differential profit capacity of a business"?

Answer Review

1 Which phrase best summarizes the accounting definition of goodwill as "the capitalised value attached to the differential profit capacity of a business"?

A The total market value of the firm's physical assets.

B The monetary advantage that allows a firm to earn super profits.

C The combined capital of all incoming partners.

D The exact sum of past five years' total revenues.

💡 Short Explanation

Goodwill relates to earning advantage. It creates super profits. Intangible business benefit.

✅ Correct Answer Explanation

Goodwill represents the monetary value of a firm's ability to earn excess profits over normal returns. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Physical assets only.
Option C → Capital unrelated.
Option D → Revenue total irrelevant.

🎯 Strategy

Used

Concept Definition Recall

Application:

�� Identify accounting meaning of goodwill.

Final Logic:

�� Goodwill measures earning superiority.

🧠 Memory Trick

"Goodwill = Super Profit Power"

📚 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 Under Accounting Standard 26, which of the following criteria apply to intangible assets like goodwill?
I. Internally generated goodwill should not be recognized as an asset.
II. Purchased goodwill may be accounted for in the books and shown as an asset.
III. Goodwill should be written off in a period not exceeding 10 years.

A I and II only

B II and III only

C I, II, and III

D I and III only

💡 Short Explanation

Internally generated goodwill excluded. Purchased goodwill recognized. Write-off period limited.

✅ Correct Answer Explanation

AS-26 states: Self-generated goodwill is not recognized. Purchased goodwill may be recorded. It should generally be written off within 10 years. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement III also true.
Option B → Statement I true.
Option D → Statement II true.

🎯 Strategy

Used

Accounting Standard Recall

Application:

�� Apply AS-26 provisions.

Final Logic:

�� All three statements valid.

🧠 Memory Trick

"Self-Created No, Purchased Yes"

📚 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 Arrange the following steps explaining how reputation translates into goodwill valuation:
I. Earning excess profits over normal industry returns.
II. Establishing a business and maintaining quality over time.
III. Developing a good name and wide business connections.
IV. Capitalising the differential profit capacity.

A I, II, III, IV

B IV, III, I, II

C III, I, II, IV

D II, III, I, IV

💡 Short Explanation

Business established first. Reputation develops gradually. Excess profits then capitalized.

✅ Correct Answer Explanation

Correct sequence: Establish quality business Build reputation Earn excess profits Capitalise differential profits Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Profit cannot precede reputation.
Option B → Capitalisation occurs last.
Option C → Business establishment omitted first.

🎯 Strategy

Used

Sequential Logic

Application:

�� Arrange goodwill development logically.

Final Logic:

�� Reputation leads to super profits.

🧠 Memory Trick

"Quality → Reputation → Profit → Goodwill"

📚 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 has an average profit of Rs. 60,000. Its capital employed is Rs. 5,00,000, and the normal rate of return is 10%. Calculate the super profit.

A Rs. 10,000

B Rs. 50,000

C Rs. 60,000

D Rs. 1,10,000

💡 Short Explanation

Calculate normal profit first. Compare with average profit. Difference equals super profit.

✅ Correct Answer Explanation

Normal Profit: 500000 × (10/100) = 50000 Super Profit: 60000 - 50000 = 10000 60000 - 50000 = 10000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Normal profit only.
Option C → Average profit only.
Option D → Incorrect addition.

🎯 Strategy

Used

Super Profit Formula

Application:

�� Actual Profit − Normal Profit.

Final Logic:

�� Excess earning equals Rs. 10,000.

🧠 Memory Trick

"Super = Actual − Normal"

📚 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 Under the average profits method, goodwill is calculated by multiplying past average profits by the number of years. What does the "number of years" signify?

A The total lifespan of the partnership firm.

B The number of years the old partners have managed the firm.

C The minimum years required by AS-26 to write off goodwill.

D The period during which the anticipated profits are expected to accrue.

💡 Short Explanation

Future anticipated benefit measured. Profits expected for certain years. Goodwill based on earning duration.

✅ Correct Answer Explanation

The number of years indicates the period during which expected future profits are likely to continue. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Lifespan irrelevant.
Option B → Management years unrelated.
Option C → AS-26 write-off separate.

🎯 Strategy

Used

Concept Interpretation

Application:

�� Interpret meaning of years' purchase.

Final Logic:

�� Goodwill reflects future earning period.

🧠 Memory Trick

"Years = Future Benefit Period"

📚 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 Assertion (A): Any firm that earns normal profits or is incurring losses has no goodwill.
Reason (R): Goodwill exists only when a firm possesses a competitive advantage that allows it to earn super profits compared to other firms in the same industry.

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

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

C A is true, but R is false.

D A is false, but R is true.

💡 Short Explanation

Goodwill linked with super profits. Competitive advantage necessary. Reason explains assertion fully.

✅ Correct Answer Explanation

Goodwill exists when a firm earns profits above normal industry returns due to special advantages. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Reason correctly explains.
Option C → Reason true.
Option D → Assertion also true.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

�� Relate goodwill with competitive advantage.

Final Logic:

�� Super profits create 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 Match the factors and elements of goodwill valuation to their correct features:

List 1	List 2
1. Capitalisation Method	a. Nature of Business
2. Super Profit	b. Anticipated profits based on past performance
3. Average Profit	c. Excess of actual profits over normal profits
4. Stable Demand	d. Deducting actual capital from the capitalized value of profits

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

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

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

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

💡 Short Explanation

Capitalisation compares business value. Super profit means excess earnings. Stable demand reflects business nature.

✅ Correct Answer Explanation

Correct matching: Capitalisation → Deduct actual capital Super Profit → Excess earnings Average Profit → Past-based estimate Stable Demand → Nature of business Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Average profit mismatched.
Option B → Capitalisation incorrect.
Option D → Multiple wrong links.

🎯 Strategy

Used

Matching Logic

Application:

�� Relate valuation concepts correctly.

Final Logic:

�� Only Option C fully matches.

🧠 Memory Trick

"Super Profit = Excess Profit"

📚 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 If a business relocates from a heavy customer traffic zone to a remote industrial park, what is the most likely immediate accounting implication for its goodwill valuation upon a partner's admission?

A The expected future super profits will likely decline, reducing the goodwill value.

B The goodwill will strictly increase due to lower rent costs.

C The location change will not affect the goodwill if historical profits were high.

D Goodwill will automatically convert into a fictitious asset.

💡 Short Explanation

Customer access affects profits. Poor location reduces demand. Goodwill likely decreases.

✅ Correct Answer Explanation

A less favorable location may reduce future earnings and therefore lower goodwill value. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Rent savings not sufficient.
Option C → Future profits matter.
Option D → Goodwill remains intangible asset.

🎯 Strategy

Used

Business Environment Analysis

Application:

�� Connect location with profitability.

Final Logic:

�� Reduced customer flow lowers goodwill.

🧠 Memory Trick

"Good Location = Better 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 When management is highly efficient, it creates cost efficiency. How is this reflected in the super profits method of valuation?

A By reducing the firm's capital employed.

B By increasing the average actual profits, thereby widening the gap over normal profits.

C By artificially lowering the normal rate of return.

D By increasing the value of outside liabilities.

💡 Short Explanation

Efficient management increases profits. Super profit gap widens. Goodwill increases accordingly.

✅ Correct Answer Explanation

Higher efficiency improves actual profits while normal profit may remain unchanged. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Capital employed unaffected.
Option C → NRR not artificially changed.
Option D → Liabilities irrelevant.

🎯 Strategy

Used

Profit Analysis

Application:

�� Relate management efficiency with profits.

Final Logic:

�� Increased profits create higher goodwill.

🧠 Memory Trick

"Efficiency Raises Super Profit"

📚 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 If efficient management increases average profits (AP) while normal profits (NP) remain constant, which formula shows the impact on goodwill (GW) under the super profits method (where Y = years' purchase)?

A GW = (NP - AP) × Y

B GW = (AP / NP) × Y

C GW = (AP - NP) × Y

D GW = (AP + NP) / Y

💡 Short Explanation

Goodwill based on super profit. Super profit equals AP minus NP. Multiplied by years' purchase.

✅ Correct Answer Explanation

Formula: GW=(AP-NP)\times Y Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Reverse subtraction.
Option B → Division not used.
Option D → Addition incorrect.

🎯 Strategy

Used

Formula Recall

Application:

�� Apply goodwill formula.

Final Logic:

�� Goodwill based on excess profits.

🧠 Memory Trick

"Goodwill = Super Profit × Years"

📚 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 In a highly competitive market without any monopoly advantage, a firm is only able to earn the normal rate of return. What is its goodwill value?

A Equal to its average profits.

B Capitalised value of its total assets.

C Equal to the capital employed.

D Zero, because it earns no super profits.

💡 Short Explanation

Only normal profits earned. No competitive advantage exists. Goodwill becomes zero.

✅ Correct Answer Explanation

Without super profits, goodwill does not exist. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Average profit not goodwill.
Option B → Asset value unrelated.
Option C → Capital employed different concept.

🎯 Strategy

Used

Conceptual Understanding

Application:

�� Link goodwill with super profits.

Final Logic:

�� Normal return alone creates no goodwill.

🧠 Memory Trick

"No Super Profit = 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 A firm enjoys a monopoly condition, allowing it to charge premium prices. This results in an average profit of Rs. 50,000 against a normal profit of Rs. 30,000. Under 3 years' purchase of super profit, the goodwill is:

A Rs. 60,000

B Rs. 90,000

C Rs. 1,50,000

D Rs. 20,000

💡 Short Explanation

Super profit calculated first. Multiply by years' purchase. Goodwill obtained.

✅ Correct Answer Explanation

Super Profit: 50000 - 30000 = 20000 Goodwill: 20000 × 3 = 60000 (50000 - 30000) × 3 = 60000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect multiplication.
Option C → Average profit multiplied directly.
Option D → Only super profit.

🎯 Strategy

Used

Super Profit Method

Application:

�� Compute excess profit first.

Final Logic:

�� Goodwill equals Rs. 60,000.

🧠 Memory Trick

"Super Profit × Years"

📚 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 Assertion (A): A firm with special import licenses will typically have a higher value of goodwill than a similar firm without them.
Reason (R): Import licenses are physical assets that are directly added to the plant and machinery account.

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

Import licenses create advantage. They are intangible benefits. Not plant and machinery assets.

✅ Correct Answer Explanation

Special licenses improve earning capacity and goodwill, but they are not physical assets. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

�� Differentiate intangible and physical assets.

Final Logic:

�� Licenses raise goodwill indirectly.

🧠 Memory Trick

"Licenses Give Advantage, Not Machinery"

📚 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 Which of the following statements is/are true regarding contracts and patents in goodwill valuation?
I. They are considered special advantages.
II. They enable a firm to earn higher profits.
III. They are completely ignored if the capitalization method is used.

A I only

B I and II only

C II and III only

D I, II, and III

💡 Short Explanation

Contracts create special advantage. Patents increase profits. Capitalisation method still considers them indirectly.

✅ Correct Answer Explanation

Statements I and II are correct. Statement III is false because such advantages influence profitability under all methods. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Statement II also true.
Option C → Statement III false.
Option D → III incorrect.

🎯 Strategy

Used

Statement Verification

Application:

�� Evaluate role of patents and contracts.

Final Logic:

�� Special advantages increase goodwill.

🧠 Memory Trick

"Patents Increase Profit Power"

📚 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 X and Y share profits 3:2. Z is admitted for 1/5th share. The total goodwill of the firm is valued at Rs. 20,000. How much premium for goodwill must Z bring in cash?

A Rs. 4,000

B Rs. 5,000

C Rs. 10,000

D Rs. 20,000

💡 Short Explanation

New partner brings share proportionately. Multiply goodwill by incoming share. Premium calculated.

✅ Correct Answer Explanation

Z's Share of Goodwill: 20000 × (1/5) = 4000 20000 × (1/5) = 4000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrect fraction.
Option C → Half goodwill wrongly assumed.
Option D → Total goodwill amount only.

🎯 Strategy

Used

Proportion Method

Application:

�� Multiply total goodwill by incoming share.

Final Logic:

�� Premium equals Rs. 4,000.

🧠 Memory Trick

"Goodwill × Incoming Share"

📚 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 Why is goodwill valuation needed when there is a change in the profit-sharing ratio among existing partners?

A To admit a new partner into the firm.

B To dissolve the existing partnership firm legally.

C To write off all accumulated reserves.

D To compensate the partner(s) whose share in future profits is sacrificed in favor of the gaining partner(s).

💡 Short Explanation

Some partners sacrifice share. Others gain additional share. Compensation required through goodwill.

✅ Correct Answer Explanation

Goodwill adjustment ensures fairness between sacrificing and gaining partners. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No new partner necessarily.
Option B → Ratio change not dissolution.
Option C → Reserves unrelated.

🎯 Strategy

Used

Concept Application

Application:

�� Identify purpose of goodwill adjustment.

Final Logic:

�� Sacrifice requires compensation.

🧠 Memory Trick

"Sacrifice Must Be Compensated"

📚 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 In which scenario alongside admission and change in ratio is goodwill explicitly required to be adjusted in a continuing firm?

A When a new machinery is purchased.

B Upon the retirement of an existing partner.

C When the firm takes a short-term bank loan.

D During routine year-end stock valuation.

💡 Short Explanation

Retirement changes profit shares. Goodwill adjustment required. Continuing firm remains active.

✅ Correct Answer Explanation

Retirement requires goodwill adjustment because the retiring partner must be compensated. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Machinery unrelated.
Option C → Loan unrelated.
Option D → Stock valuation routine only.

🎯 Strategy

Used

Accounting Event Identification

Application:

�� Determine situations requiring goodwill.

Final Logic:

�� Retirement affects partner rights.

🧠 Memory Trick

"Retirement Needs Goodwill Adjustment"

📚 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 In the context of dissolution, when is goodwill valuation specifically necessary?

A When assets are distributed among partners in their capital ratio.

B When the firm is declared insolvent.

C When the business is sold as a going concern.

D When the court mandates forced liquidation.

💡 Short Explanation

Goodwill valuable only if business continues. Going concern retains reputation value. Sale includes goodwill value.

✅ Correct Answer Explanation

Goodwill is valued when the business continues as a going concern after sale. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Capital ratio irrelevant.
Option B → Insolvency reduces goodwill importance.
Option D → Forced liquidation not necessary.

🎯 Strategy

Used

Conceptual Understanding

Application:

�� Relate goodwill with continuity.

Final Logic:

�� Reputation matters only for continuing business.

🧠 Memory Trick

"Goodwill Exists with Going Concern"

📚 Category 10: Methods Overview Passage Read the following passage carefully to answer the next question: "Under the average profits method, goodwill is valued at an 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. But it is contended that the buyer's real benefit does not lie in total profits; it is limited to such amounts of profits which are in excess of the normal return on capital employed. Therefore, it is desirable to value goodwill on the basis of the excess profits and not the actual profits."

19 According to the passage, if a firm's past average profits are Rs. 40,000, and the normal return on capital employed is Rs. 25,000, what is the basis for goodwill under the super profits method before applying years' purchase?

A Rs. 15,000

B Rs. 25,000

C Rs. 40,000

D Rs. 65,000

💡 Short Explanation

Super profit equals excess profit. Compare average and normal profit. Difference forms goodwill base.

✅ Correct Answer Explanation

Super Profit: [40000 - 25000 = 15000] 40000-25000=15000 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Normal profit only.
Option C → Average profit only.
Option D → Incorrect addition.

🎯 Strategy

Used

Super Profit Calculation

Application:

�� Actual profit minus normal return.

Final Logic:

�� Excess profit equals Rs. 15,000.

🧠 Memory Trick

"Average Minus Normal"

20 What is the core theoretical advantage of the super profits method over the average profits method, as highlighted in the passage?

A It requires fewer mathematical calculations.

B It accounts for the total profits indefinitely into the future.

C It relies purely on the future estimated lifespan of the firm.

D It focuses on the buyer's real benefit, which is the excess over the normal return, rather than total profits.

💡 Short Explanation

Buyer benefits from excess profits. Normal return excluded. Super profit method more realistic.

✅ Correct Answer Explanation

The super profits method values only the excess return above normal profits, which represents the real advantage to the buyer. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Calculation complexity not main reason.
Option B → Indefinite profits not considered.
Option C → Lifespan not sole basis.

🎯 Strategy

Used

Passage Interpretation

Application:

�� Compare valuation methods.

Final Logic:

�� Super profits reflect real earning advantage.

🧠 Memory Trick

"Real Benefit = Excess Profit"

📚 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 1 Goodwill Concepts

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