CUET UG Accountancy Booster Test 1 Valuation of Goodwill -

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CUET UG Accountancy Booster Test 1 Valuation of Goodwill

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 1 Valuation of Goodwill

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QUESTION 1 OF 20

Why does a buyer of a running business pay goodwill calculated using the average profit method?

Answer Review

1 Why does a buyer of a running business pay goodwill calculated using the average profit method?

A Because it guarantees future fixed asset appreciation.

B Because there are no external liabilities to assume.

C To compensate for the profits they are likely to receive for the first few years without extra effort.

D To artificially increase the firm's equity capital.

💡 Short Explanation

Buyer receives future benefits. Existing reputation generates profits. Goodwill compensates expected earnings.

✅ Correct Answer Explanation

The buyer pays goodwill because the running business already has earning capacity that provides profits immediately. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Asset appreciation unrelated.
Option B → Liabilities not main reason.
Option D → Equity increase not purpose.

🎯 Strategy

Used

Conceptual Understanding

Application:

�� Identify purpose of goodwill payment.

Final Logic:

�� Goodwill reflects future earning advantage.

🧠 Memory Trick

"Goodwill Pays for Future Profits"

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

2 A firm earns Rs. 4,38,600 on average over five years. It calculates goodwill based on 4 years' purchase. What is the final goodwill amount?

A Rs. 4,38,600

B Rs. 8,77,200

C Rs. 13,15,800

D Rs. 17,54,400

💡 Short Explanation

Average profit identified first. Multiply by years' purchase. Final goodwill obtained.

✅ Correct Answer Explanation

Goodwill: 438600 × 4 = 1754400 438600 × 4 = 1754400 Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Average profit only.
Option B → Multiplied by 2.
Option C → Multiplied by 3.

🎯 Strategy

Used

Average Profit Formula

Application:

�� Average Profit × Years Purchase.

Final Logic:

�� Goodwill equals Rs. 17,54,400.

🧠 Memory Trick

"Average Profit × 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 Profits for 4 years are Rs. 20,200, Rs. 24,800, Rs. 20,000, and Rs. 30,000. Less a constant management cost of Rs. 4,800 applied each year. What is the total adjusted profit over 4 years before any other adjustments?

A Rs. 75,800

B Rs. 95,000

C Rs. 85,800

D Rs. 19,200

💡 Short Explanation

Total profits calculated first. Management cost deducted yearly. Adjusted profit determined.

✅ Correct Answer Explanation

Total Profit: 20200 + 24800 + 20000 + 30000 = 95000 Total Management Cost: 4800 × 4 = 19200 Adjusted Profit: 95000 - 19200 = 75800 95000 - 19200 = 75800 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Total profit before adjustment.
Option C → Incorrect subtraction.
Option D → Only management cost.

🎯 Strategy

Used

Adjustment Calculation

Application:

�� Deduct yearly expenses from total profits.

Final Logic:

�� Adjusted profit equals Rs. 75,800.

🧠 Memory Trick

"Total Profit − Total Adjustment"

📚 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 When a simple average is calculated across a five-year period, what is the implicit weight given to the 5th year compared to the 1st year?

A 5 times greater weight

B Equal weight

C 1/5th the weight

D Zero weight

💡 Short Explanation

Simple average treats equally. Every year equally important. No weighted preference.

✅ Correct Answer Explanation

Under simple average method, every year receives equal importance. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Weighted average concept.
Option C → Incorrect reduction.
Option D → No exclusion.

🎯 Strategy

Used

Method Identification

Application:

�� Distinguish simple from weighted average.

Final Logic:

�� All years treated equally.

🧠 Memory Trick

"Simple Average = Equal Importance"

📚 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 adjusted profits for years 1 to 5 are assigned weights 1 to 5 respectively, the Weighted Average Profit is computed mathematically by:

A Dividing the total of the product of profits and weights by the sum of weights (15).

B Dividing the total of the product of profits and weights by 5.

C Dividing the simple average of profits by 15.

D Multiplying simple average profits by 5.

💡 Short Explanation

Weighted profits calculated first. Total divided by weight sum. More recent years emphasized.

✅ Correct Answer Explanation

Formula: Weighted Average = Σ(P × W) / ΣW Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Ignores total weights.
Option C → Incorrect formula.
Option D → Multiplication unnecessary.

🎯 Strategy

Used

Formula Recall

Application:

�� Use weighted average formula.

Final Logic:

�� Divide by total weights.

🧠 Memory Trick

"Weighted Sum ÷ Total Weights"

📚 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 true?
I. Weighted average gives a more accurate picture when profits exhibit a rising trend.
II. Weight 5 for the most recent year signifies its greater relevance to future expectations compared to weight 1.

A I only

B II only

C Both I and II

D Neither I nor II

💡 Short Explanation

Recent profits more relevant. Rising trend better represented. Weighted average improves accuracy.

✅ Correct Answer Explanation

Both statements correctly explain the usefulness of weighted average profit method. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Statement II also true.
Option B → Statement I also true.
Option D → Both are valid.

🎯 Strategy

Used

Statement Verification

Application:

�� Evaluate weighted average principles.

Final Logic:

�� Recent trends deserve higher weight.

🧠 Memory Trick

"Recent Years Matter More"

📚 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 excludes any super profit expected by the firm.
Reason (R): Normal profit relies solely on the amount of external liabilities.

A Both A and R are true.

B A is false, but R is true.

C Both A and R are false.

D A is true, but R is false.

💡 Short Explanation

Normal profit excludes excess return. External liabilities alone insufficient. Reason incorrect.

✅ Correct Answer Explanation

Normal profit represents ordinary industry return and does not depend solely on outside liabilities. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

�� Differentiate normal and super profit.

Final Logic:

�� Normal profit based on capital employed.

🧠 Memory Trick

"Normal Profit Excludes Extra Profit"

📚 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 elements in Super Profit Valuation:

List 1	List 2
1. Normal Return Rate	a. Total assets minus outside liabilities
2. Average Profit	b. Expected market yield %
3. Capital Employed	c. Excess of Average over Normal
4. Super Profit	d. Adjusted past earnings

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

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

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

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

💡 Short Explanation

Return rate means market yield. Capital employed equals net assets. Super profit means excess profit.

✅ Correct Answer Explanation

Correct matching: Normal Return Rate → Market yield % Average Profit → Adjusted earnings Capital Employed → Assets − liabilities Super Profit → Excess over normal Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Average profit mismatched.
Option C → Return rate incorrect.
Option D → Multiple mismatches.

🎯 Strategy

Used

Matching Logic

Application:

�� Relate valuation components correctly.

Final Logic:

�� Only Option B fully correct.

🧠 Memory Trick

"Super Profit = Excess Profit"

📚 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 steps to ascertain capital employed for finding normal profits:
1. Exclude fictitious assets and goodwill.
2. Identify partner's capital and reserves.
3. Determine the firm's total capital base equivalent.

A 3, 2, 1

B 1, 3, 2

C 1, 2, 3

D 2, 1, 3

💡 Short Explanation

Identify capital sources first. Remove fictitious assets. Determine final capital employed.

✅ Correct Answer Explanation

Correct sequence: Identify partner capital/reserves Exclude fictitious assets Determine final capital base Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Final step misplaced.
Option B → Capital identification delayed.
Option C → Wrong logical order.

🎯 Strategy

Used

Sequential Accounting Logic

Application:

�� Arrange capital computation steps.

Final Logic:

�� Adjustments occur before final capital.

🧠 Memory Trick

"Identify → Exclude → Finalize"

📚 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 If a firm's Capital is Rs. 1,00,000, normal interest rate is 15%, and annual partner's salary is Rs. 12,000, what is the normal profit calculated before finding super profit?

A Rs. 15,000

B Rs. 12,000

C Rs. 27,000

D Rs. 36,000

💡 Short Explanation

Calculate normal return first. Add partner salary. Obtain normal profit.

✅ Correct Answer Explanation

Normal Return: 100000 × (15/100) = 15000 Add Salary: 15000 + 12000 = 27000 15000 + 12000 = 27000 Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Interest only.
Option B → Salary only.
Option D → Incorrect addition.

🎯 Strategy

Used

Normal Profit Calculation

Application:

�� Add salary to expected return.

Final Logic:

�� Normal profit equals Rs. 27,000.

🧠 Memory Trick

"Interest + Salary = Normal Profit"

📚 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 If Actual Average Profits are Rs. 60,000 and Normal Profits are Rs. 50,000, calculating (60,000 - 50,000) directly yields the mathematical value of:

A Super Profit

B Goodwill

C Capital Employed

D Capitalised value

💡 Short Explanation

Super profit means excess profit. Difference directly calculated. Goodwill not yet computed.

✅ Correct Answer Explanation

[60000 - 50000 = 10000] This represents Super Profit. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Years purchase not applied.
Option C → Capital unrelated.
Option D → Capitalisation not calculated.

🎯 Strategy

Used

Formula Application

Application:

�� Actual Profit − Normal Profit.

Final Logic:

�� Excess equals super profit.

🧠 Memory Trick

"Actual − Normal = Super"

📚 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 Why are super profits multiplied by a specific "years purchase" value?

A To determine the normal return rate.

B To estimate the total excess benefit likely to be available in future years.

C To proportionately reduce the taxable income.

D To calculate average profit more accurately.

💡 Short Explanation

Future benefits expected. Excess profits continue temporarily. Years estimate earning duration.

✅ Correct Answer Explanation

Years' purchase reflects the future period over which super profits are expected. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Return rate already known.
Option C → Taxation unrelated.
Option D → Average profit unaffected.

🎯 Strategy

Used

Concept Interpretation

Application:

�� Understand purpose of years purchase.

Final Logic:

�� Measures future earning advantage.

🧠 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 Evaluate these statements:
I. Capitalisation of average profits involves directly multiplying average profit by years of purchase.
II. It divides average profits by the normal rate of return to find the business's total capitalised value.

A I is true, II is false.

B II is true, I is false.

C Both are true.

D Both are false.

💡 Short Explanation

Capitalisation uses division method. Years purchase belongs another method. Statement I incorrect.

✅ Correct Answer Explanation

Capitalisation of average profits: Capitalised Value = (Average Profit × 100) / Normal Rate Hence, Statement II is true and I is false.

❓ Why Other Options Are Incorrect

Option A → Statement I incorrect.
Option C → Both not true.
Option D → Statement II true.

🎯 Strategy

Used

Formula Differentiation

Application:

�� Distinguish average and capitalisation methods.

Final Logic:

�� Division method used here.

🧠 Memory Trick

"Capitalisation Uses Division"

📚 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 Capitalisation of super profit method requires deducting net assets from capitalised super profits.
Reason (R): Goodwill under this method = Super Profits × (100 / Normal Rate of Return).

A Both A and R are true.

B A is true, R is false.

C Both A and R are false.

D A is false, R is true.

💡 Short Explanation

Formula for super profit capitalisation correct. Deducting net assets belongs another method. Assertion false.

✅ Correct Answer Explanation

Goodwill by super profit capitalisation: Goodwill = Super Profit × (100 / Normal Rate) Hence, Assertion false and Reason true.

❓ Why Other Options Are Incorrect

Option A → Assertion incorrect.
Option B → Reason true.
Option C → Reason not false.

🎯 Strategy

Used

Formula Recognition

Application:

�� Differentiate capitalisation approaches.

Final Logic:

�� Net asset deduction not required here.

🧠 Memory Trick

"Super Profit × 100/NRR"

📚 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. 30,000, Normal rate = 10%, Actual Capital Employed = Rs. 2,00,000. What is goodwill by capitalising super profits?

A Rs. 3,00,000

B Rs. 2,00,000

C Rs. 1,00,000

D Rs. 10,000

💡 Short Explanation

Calculate capitalised value first. Compare with actual capital. Difference equals goodwill.

✅ Correct Answer Explanation

Capitalised Value: (30000 × 100) / 10 = 300000 Goodwill: 300000 - 200000 = 100000 300000 - 200000 = 100000 Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Capitalised value only.
Option B → Actual capital only.
Option D → Incorrect difference.

🎯 Strategy

Used

Capitalisation Method

Application:

�� Compare capitalised and actual capital.

Final Logic:

�� Goodwill equals excess value.

🧠 Memory Trick

"Capitalised Value − Actual Capital"

📚 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 When the capitalised value of average profits is Rs. 10,00,000 and net assets are Rs. 8,20,000, the difference of Rs. 1,80,000 conceptually represents:

A Goodwill of the firm

B Total external liabilities

C Total Super Profit for one single year

D Fictitious assets excluded

💡 Short Explanation

Capitalised value exceeds net assets. Excess represents goodwill. Intangible earning advantage measured.

✅ Correct Answer Explanation

[1000000-820000=180000] Difference represents goodwill. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Liabilities already adjusted.
Option C → Not yearly profit.
Option D → Fictitious assets separate.

🎯 Strategy

Used

Net Asset Comparison

Application:

�� Subtract net assets from business value.

Final Logic:

�� Excess equals goodwill.

🧠 Memory Trick

"Business Value − Net Assets"

📚 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 For correctly determining net assets for capitalisation, total assets should include:

A Only fixed assets

B Only current assets

C All assets excluding existing goodwill and fictitious assets

D Total assets including all fictitious assets

💡 Short Explanation

Net assets exclude fictitious assets. Existing goodwill excluded too. Real assets considered.

✅ Correct Answer Explanation

Only genuine realizable assets are included while computing net assets. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Current assets also needed.
Option B → Fixed assets omitted wrongly.
Option D → Fictitious assets excluded.

🎯 Strategy

Used

Net Asset Principle

Application:

�� Identify valid asset inclusion.

Final Logic:

�� Only real assets counted.

🧠 Memory Trick

"Exclude Fictitious and Old Goodwill"

📚 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 terms to form the Net Assets calculation correctly from left to right:
1. Outside Liabilities
2. Minus (-)
3. Total Assets (excluding goodwill)

A 1, 2, 3

B 3, 2, 1

C 2, 3, 1

D 1, 3, 2

💡 Short Explanation

Start with total assets. Deduct outside liabilities. Net assets obtained.

✅ Correct Answer Explanation

Formula: Net Assets = Total Assets - Outside Liabilities Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Reverse sequence.
Option C → Minus symbol misplaced.
Option D → Incorrect order.

🎯 Strategy

Used

Formula Arrangement

Application:

�� Arrange net asset components.

Final Logic:

�� Assets minus liabilities.

🧠 Memory Trick

"Assets − Liabilities"

📚 Category 10: Final Goodwill Value Passage (Q19): "Goodwill exists only when the firm earns super profits. Any firm that earns normal profits or is incurring losses has no goodwill. The main factors affecting the value of goodwill include the nature of business, location, efficiency of management, market situation, and special advantages like import licences. The final goodwill value is based on specific computation steps such as average profit capitalisation."

19 Based on the passage, if a firm computes its actual profit which is exactly equal to its normal profit, what is its final goodwill?

A Zero

B High, if location is good

C Equal to its normal profit

D Equal to capital employed

💡 Short Explanation

No super profit exists. Goodwill requires excess profit. Final goodwill becomes zero.

✅ Correct Answer Explanation

When actual profit equals normal profit: Super Profit = 0 Therefore, goodwill is zero. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Location alone insufficient.
Option C → Goodwill not equal profit.
Option D → Capital unrelated.

🎯 Strategy

Used

Super Profit Logic

Application:

�� Compare actual and normal profits.

Final Logic:

�� No excess means no goodwill.

🧠 Memory Trick

"No Super Profit = No Goodwill"

📚 Category 10: Final Goodwill Value Passage (20): "Goodwill exists only when the firm earns super profits. Any firm that earns normal profits or is incurring losses has no goodwill. The main factors affecting the value of goodwill include the nature of business, location, efficiency of management, market situation, and special advantages like import licences. The final goodwill value is based on specific computation steps such as average profit capitalisation."

20 Which contextual factor implies a higher final goodwill value according to the passage?

A Having centralised external liabilities

B Incurring business losses

C Earning exactly normal profits

D Having special advantages like import licences

💡 Short Explanation

Special advantages increase profits. Import licences create monopoly benefit. Goodwill rises accordingly.

✅ Correct Answer Explanation

Special advantages improve earning capacity and increase goodwill value. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Liabilities reduce value.
Option B → Losses reduce goodwill.
Option C → Normal profits create no goodwill.

🎯 Strategy

Used

Passage Interpretation

Application:

�� Identify goodwill-enhancing factor.

Final Logic:

�� Competitive advantages raise goodwill.

🧠 Memory Trick

"Special Advantage = Higher Goodwill"

📚 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 1 Valuation of Goodwill

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