CUET UG Accountancy Booster Test 3 Treatment of Goodwill -

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CUET UG Accountancy Booster Test 2 Treatment of Goodwill

⏱️ 30 Minutes

❓ 20 Questions

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

CUET UG Accountancy Booster Test 2 Treatment of Goodwill

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QUESTION 1 OF 20

📄 Passage

Sometimes the new partner brings part of premium for goodwill in cash. In such a situation, the new partner's current account will be debited by the amount not brought by the new partner. For example, for a share of goodwill of Rs. 50,000, the new partner brings Rs. 20,000 only. The Bank Account is debited by Rs. 20,000, Premium for Goodwill by Rs. 20,000, and the Incoming Partner's Current Account is debited by Rs. 30,000.

According to the passage, if the new partner's total share of goodwill is Rs. 50,000 and he brings Rs. 20,000 in cash, how much is debited to his Current Account?

Answer Review

📄 Passage

According to the passage, if the new partner's total share of goodwill is Rs. 50,000 and he brings Rs. 20,000 in cash, how much is debited to his Current Account?

A Rs. 50,000

B Rs. 20,000

C Rs. 30,000

D Rs. 70,000

💡 Short Explanation

Calculate the total goodwill share. Deduct the cash brought by the new partner. The unpaid balance is debited to the Current Account.

✅ Correct Answer Explanation

According to the passage, when a new partner brings only part of the premium for goodwill in cash, the unpaid portion is debited to the Incoming Partner's Current Account. Calculation: Total Goodwill Share = Rs. 50,000 Cash Brought = Rs. 20,000 Current Account Debit = Rs. 50,000 − Rs. 20,000 = Rs. 30,000 Therefore, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Represents the total goodwill share, not the unpaid amount.
Option B → Represents only the cash brought.
Option D → Incorrect calculation.

🎯 Strategy

Used: Deficiency Calculation

Application:

Current Account Debit = Total Goodwill Share − Cash Brought

Final Logic:

Only the unpaid goodwill is debited to the Current Account.

🧠 Memory Trick

"Unpaid Goodwill = Current A/c Debit."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm: Admission of a Partner – Premium for Goodwill

📄 Passage

According to the passage, why is the Incoming Partner's Current Account debited?

A For the total amount of capital brought

B For the cash brought specifically for goodwill

C For the revaluation loss adjusted

D For the amount of goodwill not brought in cash

💡 Short Explanation

The partner brings only part of the goodwill in cash. The remaining amount is unpaid. The unpaid amount is adjusted through the Current Account.

✅ Correct Answer Explanation

When the incoming partner pays only a portion of the goodwill premium in cash, the remaining unpaid amount cannot remain unrecorded. Therefore, the deficiency is debited to the Incoming Partner's Current Account so that the total premium due is fully adjusted. Hence, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → Refers to capital contribution, not goodwill deficiency.
Option B → Cash already received is debited to the Bank Account.
Option C → Revaluation adjustment is unrelated.

🎯 Strategy

Used: Passage Interpretation

Application:

Identify the accounting treatment of the unpaid goodwill amount.

Final Logic:

Only the unpaid goodwill is adjusted through the Current Account.

🧠 Memory Trick

"Shortfall Goes to Current A/c."

📚 Class XII – Accountancy Part I – Admission of a Partner – Premium for Goodwill

3 Goodwill can be conceptually defined as the present value of a firm's anticipated excess earnings. The monetary advantage over normal profit capacities is termed as:

A Super Profits

B Revaluation Gain

C Accumulated Reserves

D Deficient Capital

💡 Short Explanation

Goodwill arises from excess earnings. Excess earnings are called super profits. Super profits create goodwill.

✅ Correct Answer Explanation

Goodwill represents the value of a firm's reputation and earning capacity. It is generally calculated based on super profits, which are the profits earned over and above the normal expected return on capital employed. Therefore, Super Profits are the monetary advantage that gives rise to goodwill. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Revaluation gain results from revaluation of assets and liabilities.
Option C → Accumulated reserves are retained earnings, not excess profits.
Option D → Deficient capital has no relation to goodwill valuation.

🎯 Strategy

Used: Concept Identification

Application:

Relate goodwill to the firm's earning capacity.

Final Logic:

Goodwill exists because the firm earns super profits.

🧠 Memory Trick

"Super Profits Create Goodwill."

📚 Class XII – Accountancy Part I – Admission of a Partner – Valuation of Goodwill

4 The exact compensation amount brought by the new partner (Premium for Goodwill) is formulated as:

A Total Goodwill × Old Ratio

B Total Firm Goodwill × New Partner's Share

C Normal Profits × New Partner's Share

D Total Capital × New Partner's Share

💡 Short Explanation

Value the firm's total goodwill. Determine the incoming partner's share. Multiply both to calculate the premium.

✅ Correct Answer Explanation

The premium for goodwill payable by a new partner is calculated on the basis of the firm's total goodwill and the share of profits acquired by the incoming partner. Formula: Premium for Goodwill = Total Firm Goodwill × New Partner's Share Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Old ratio is used for distribution, not calculation.
Option C → Normal profits are not directly used.
Option D → Capital has no role in this formula.

🎯 Strategy

Used: Formula Recall

Application:

Apply the standard goodwill premium formula.

Final Logic:

Incoming partner's share determines the amount of premium.

🧠 Memory Trick

"Goodwill × Share = Premium."

📚 Class XII – Accountancy Part I – Admission of a Partner – Premium for Goodwill

5 Read the statements regarding the entries for goodwill brought in cash:
I. The Premium for Goodwill Account acts as a temporary account.
II. It is debited when distributing the goodwill to the old partners.

A Both I and II are correct

B Only I is correct

C Only II is correct

D Neither is correct

💡 Short Explanation

Premium for Goodwill is a temporary account. It is later distributed to the sacrificing partners. Both statements are correct.

✅ Correct Answer Explanation

The Premium for Goodwill Account is opened temporarily when the incoming partner brings goodwill. After recording the receipt, the account is debited and transferred to the capital accounts of the sacrificing partners according to their sacrificing ratio. Once distributed, the account is closed. Therefore, both statements are correct, making Option A the correct answer.

❓ Why Other Options Are Incorrect

Option B → Statement II is also correct.
Option C → Statement I is also correct.
Option D → Both statements are true.

🎯 Strategy

Used: Journal Entry Analysis

Application:

Understand the temporary nature and closing of the Premium for Goodwill Account.

Final Logic:

The account is opened temporarily and closed after distribution.

🧠 Memory Trick

"Temporary Then Transfer."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Journal Entries for Goodwill

6 Assertion (A): The premium for goodwill is always distributed among all partners including the new partner.
Reason (R): The new partner also gets a guaranteed share of future profits.

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

Goodwill premium is paid only to sacrificing partners. The new partner receives future profit rights, not goodwill compensation. Hence, the Assertion is false while the Reason is true.

✅ Correct Answer Explanation

The premium for goodwill is paid as compensation to the old partners who sacrifice a part of their profit-sharing ratio in favour of the incoming partner. Therefore, it is not distributed among all partners, and the new partner does not receive any portion of the goodwill premium. However, the new partner does obtain a share in future profits after admission, making the Reason true. Since the Reason does not justify the false Assertion, Option D is correct.

❓ Why Other Options Are Incorrect

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

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Differentiate between goodwill compensation and future profit sharing.

Final Logic:

Only sacrificing partners receive the goodwill premium.

🧠 Memory Trick

"Premium Goes to Sacrificers."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Premium for Goodwill

7 Match the following ratios with their specific uses in partnership accounting.

List I	List II
1. Old Ratio	a. Used for writing off existing goodwill
2. New Ratio	b. Represents the new profit-sharing agreement
3. Sacrificing Ratio	c. Used for distributing the premium for goodwill
4. Gaining Ratio	d. Used when an existing partner acquires more share

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

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

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

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

💡 Short Explanation

Old Ratio is used for writing off existing goodwill. Sacrificing Ratio distributes goodwill premium. Gaining Ratio identifies partners acquiring additional share.

✅ Correct Answer Explanation

Each ratio has a specific purpose in partnership accounting: Ratio — Use Old Ratio — Writing off existing goodwill New Ratio — New profit-sharing agreement Sacrificing Ratio — Distribution of goodwill premium Gaining Ratio — Identifies increased share of existing partners Thus, the correct matching is: 1-a, 2-b, 3-c, 4-d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Incorrectly matches Old Ratio and Sacrificing Ratio.
Option C → Old Ratio and New Ratio are interchanged.
Option D → Multiple incorrect matches.

🎯 Strategy

Used

Concept Matching

Application:

Associate each accounting ratio with its specific purpose.

Final Logic:

Each ratio has a distinct application in partnership adjustments.

🧠 Memory Trick

"Old Write-off • New Share • Sacrifice Goodwill • Gain More."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Profit-sharing Ratios

8 A and B share profits in the ratio 5 : 3. C is admitted for a 1/7 share. The sacrificing ratio is 3 : 5. C brings Rs. 8,000 as goodwill. How much is credited to A's Capital Account?

A Rs. 5,000

B Rs. 3,000

C Rs. 4,000

D Rs. 2,000

💡 Short Explanation

Goodwill is distributed in the sacrificing ratio. A's share is 3/8. A receives Rs. 3,000.

✅ Correct Answer Explanation

The goodwill premium is distributed according to the sacrificing ratio. Calculation: A's Share = ₹8,000 × 3/8 = ₹3,000 Therefore, A's Capital Account is credited with ₹3,000, making Option B correct.

❓ Why Other Options Are Incorrect

Option A → Excess allocation.
Option C → Assumes equal distribution.
Option D → Lower than the correct share.

🎯 Strategy

Used

Sacrificing Ratio Distribution

Application:

Multiply total goodwill by the partner's sacrificing share.

Final Logic:

Goodwill always follows the sacrificing ratio.

🧠 Memory Trick

"Goodwill Follows Sacrifice Ratio."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Distribution of Goodwill

9 If partners decide not to withdraw the goodwill credited to them and retain it in the business, what additional entry is required?

A Debit Bank Account

B Debit Capital Account

C Credit Bank Account

D No additional entry is required

💡 Short Explanation

Goodwill remains invested in the business. Capital Accounts have already been credited. No further journal entry is required.

✅ Correct Answer Explanation

When the old partners retain the goodwill amount in the business, there is no withdrawal of cash. Since their Capital Accounts have already been credited with the goodwill premium, no further accounting adjustment is necessary. Therefore, Option D is correct.

❓ Why Other Options Are Incorrect

Option A → No cash is paid out.
Option B → Capital Accounts are already adjusted.
Option C → Bank balance remains unchanged.

🎯 Strategy

Used

Journal Entry Logic

Application:

Determine whether any additional transaction occurs after retaining goodwill.

Final Logic:

No withdrawal means no further journal entry.

🧠 Memory Trick

"No Withdrawal = No Entry."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Goodwill Retained in Business

10 The partial withdrawal of the goodwill premium by old partners primarily results in decreasing the firm's:

A Bank/Cash Balance

B Goodwill Asset Balance

C Fixed Assets

D Revaluation Profit

💡 Short Explanation

Withdrawal involves payment of cash. Cash or Bank balance decreases. Other assets remain unaffected.

✅ Correct Answer Explanation

When the old partners withdraw the goodwill amount, the business pays cash to them. This results in a reduction of the firm's Cash/Bank Balance. No change occurs in fixed assets, goodwill asset, or revaluation profit due to this withdrawal. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Goodwill has already been adjusted.
Option C → Fixed assets are unaffected.
Option D → Revaluation profit is unrelated.

🎯 Strategy

Used

Accounting Effect Analysis

Application:

Identify which account is affected by the cash withdrawal.

Final Logic:

Cash leaves the business when goodwill is withdrawn.

🧠 Memory Trick

"Withdrawal Reduces Cash."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Withdrawal of Goodwill

11 A, B, and C are partners sharing profits in the ratio 5 : 3 : 2. They admit D for 1/5 share, which D acquires equally from A and B. What is the sacrificing ratio of A and B?

A 1 : 1

B 5 : 3

C 3 : 5

D 2 : 1

💡 Short Explanation

D acquires his share equally from A and B. Both partners sacrifice the same fraction. Therefore, the sacrificing ratio is 1 : 1.

✅ Correct Answer Explanation

D receives 1/5 share, and it is acquired equally from A and B. Therefore: A sacrifices = 1/10 B sacrifices = 1/10 Sacrificing Ratio = 1/10 : 1/10 = 1 : 1 Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Represents the old profit-sharing ratio, not the sacrifice.
Option C → Assumes unequal sacrifice.
Option D → No such division is given in the question.

🎯 Strategy

Used

Sacrificing Ratio Calculation

Application:

When the incoming partner acquires an equal share from partners, their sacrifice is equal.

Final Logic:

Equal sacrifice results in a sacrificing ratio of 1 : 1.

🧠 Memory Trick

"Equal Share Taken = Equal Sacrifice."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Sacrificing Ratio

12 Which of the following journal entries is passed when the new partner brings goodwill in cash, and the old partners immediately withdraw the amount?

A Debit Cash A/c, Credit Goodwill A/c

B Debit Cash A/c, Credit Partners' Capital A/c → followed by Debit Partners' Capital A/c, Credit Cash A/c

C Debit Goodwill A/c, Credit Cash A/c

D Debit Partners' Capital A/c, Credit Goodwill A/c

💡 Short Explanation

Goodwill received increases Cash. It is credited to sacrificing partners' capital accounts. Withdrawal reduces Cash and Capital.

✅ Correct Answer Explanation

When the incoming partner brings goodwill in cash: Entry 1 Cash A/c Dr. To Old Partners' Capital A/c (in sacrificing ratio) If the old partners immediately withdraw the goodwill: Entry 2 Old Partners' Capital A/c Dr. To Cash A/c Therefore, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill Account is not credited.
Option C → Incorrect journal entry.
Option D → Capital Accounts are not initially debited.

🎯 Strategy

Used

Journal Entry Analysis

Application:

Follow the sequence of receipt and withdrawal of goodwill.

Final Logic:

Receipt increases Cash; withdrawal decreases Cash.

🧠 Memory Trick

"Receive → Credit Capital; Withdraw → Credit Cash."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Accounting Treatment of Goodwill

13 Assertion (A): Existing goodwill appearing in the Balance Sheet should normally be written off among the old partners before the admission of a new partner.
Reason (R): The existing goodwill belongs to the old partners and should not benefit the incoming partner.

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

Existing goodwill belongs to old partners. It is written off before admission. This prevents the new partner from receiving an unfair benefit.

✅ Correct Answer Explanation

Existing goodwill shown in the Balance Sheet has been generated by the old partners. Before admitting a new partner, this goodwill is generally written off among the old partners in their old profit-sharing ratio, ensuring that the incoming partner does not receive any share in goodwill accumulated before admission. Since the Reason correctly explains the Assertion, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → The Reason directly explains the Assertion.
Option C → Both statements are true.
Option D → The Assertion is not false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Relate ownership of goodwill to its accounting treatment.

Final Logic:

Old goodwill belongs exclusively to the old partners.

🧠 Memory Trick

"Old Goodwill → Old Partners."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Existing Goodwill

14 The amount of goodwill brought by the new partner is distributed among the old partners according to the:

A Old Ratio

B New Ratio

C Sacrificing Ratio

D Gaining Ratio

💡 Short Explanation

Goodwill compensates sacrificing partners. Distribution follows the sacrificing ratio. The new partner does not receive any portion.

✅ Correct Answer Explanation

The premium for goodwill is compensation paid by the incoming partner to those existing partners who sacrifice a portion of their future profits. Therefore, the goodwill amount is distributed among the old partners according to their Sacrificing Ratio. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Old Ratio is used for writing off existing goodwill.
Option B → New Ratio applies after admission.
Option D → Gaining Ratio is mainly used at retirement or death of a partner.

🎯 Strategy

Used

Concept Identification

Application:

Identify the ratio associated with goodwill distribution.

Final Logic:

Goodwill always follows the sacrificing ratio.

🧠 Memory Trick

"Sacrifice Gets the Premium."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Sacrificing Ratio

15 Purchased goodwill recorded in the books is generally classified as:

A A fictitious asset

B A tangible fixed asset

C An intangible asset

D A current asset

💡 Short Explanation

Purchased goodwill has monetary value. It lacks physical existence. Therefore, it is an intangible asset.

✅ Correct Answer Explanation

Purchased goodwill represents the value of a firm's reputation, customer relationships, and earning capacity acquired for consideration. Although it has no physical form, it provides future economic benefits and is therefore recognized as an intangible asset in the books of accounts. Hence, Option C is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill is not a fictitious asset.
Option B → It has no physical existence.
Option D → It is not expected to be converted into cash within one year.

🎯 Strategy

Used

Asset Classification

Application:

Classify goodwill based on its accounting nature.

Final Logic:

Purchased goodwill is an intangible asset.

🧠 Memory Trick

"Goodwill = Value Without Visibility."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Purchased Goodwill

16 A and B are partners sharing profits equally. C is admitted for 1/4 share. C brings ₹40,000 as premium for goodwill. The sacrificing ratio of A and B is 3 : 1. How much goodwill will be credited to B's Capital Account?

A ₹10,000

B ₹20,000

C ₹30,000

D ₹40,000

💡 Short Explanation

Goodwill is distributed in the sacrificing ratio. B sacrifices 1/4 of the total sacrifice. B receives ₹10,000.

✅ Correct Answer Explanation

The premium brought by the new partner is distributed among the sacrificing partners according to their sacrificing ratio. Total Goodwill = ₹40,000 B's Share = ₹40,000 × 1/4 = ₹10,000 Therefore, B's Capital Account is credited with ₹10,000. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Assumes equal distribution.
Option C → This amount belongs to A's larger sacrifice.
Option D → Entire goodwill cannot be credited to one partner.

🎯 Strategy

Used

Sacrificing Ratio Calculation

Application:

Multiply total goodwill by the partner's sacrificing share.

Final Logic:

Goodwill is credited according to the sacrificing ratio.

🧠 Memory Trick

"Goodwill Follows Sacrifice."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Distribution of Goodwill

17 Assertion (A): Purchased goodwill appears in the Balance Sheet as an intangible asset.
Reason (R): Purchased goodwill represents the value of a firm's reputation and future earning capacity acquired for consideration.

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

Purchased goodwill has economic value. It provides future economic benefits. Therefore, it is recognized as an intangible asset.

✅ Correct Answer Explanation

Purchased goodwill is recorded when it is acquired for consideration. It represents intangible benefits such as reputation, customer loyalty, and future earning capacity. Since these benefits are expected to generate future economic returns, purchased goodwill is shown as an intangible asset in the Balance Sheet. The Reason correctly explains the Assertion. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → The Reason directly explains the Assertion.
Option C → Both statements are true.
Option D → The Assertion is not false.

🎯 Strategy

Used

Assertion–Reason Analysis

Application:

Relate the accounting treatment of goodwill to its economic nature.

Final Logic:

Purchased goodwill qualifies as an intangible asset because of its future economic benefits.

🧠 Memory Trick

"Good Reputation = Goodwill = Intangible Asset."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Purchased Goodwill

18 Match the following goodwill-related concepts with their correct accounting treatment.

List I	List II
1. Purchased Goodwill	a. Recorded as an intangible asset
2. Self-generated Goodwill	b. Not recorded as an asset
3. Goodwill Premium	c. Distributed among sacrificing partners
4. Existing Goodwill	d. Written off in the old profit-sharing ratio

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

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

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

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

💡 Short Explanation

Purchased goodwill is recognized as an asset. Self-generated goodwill is not recognized. Existing goodwill is written off before admission.

✅ Correct Answer Explanation

List I — List II Purchased Goodwill — Recorded as an intangible asset Self-generated Goodwill — Not recorded as an asset Goodwill Premium — Distributed among sacrificing partners Existing Goodwill — Written off in the old profit-sharing ratio Thus, the correct matching is: 1-a, 2-b, 3-c, 4-d Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → Purchased and self-generated goodwill are interchanged.
Option C → Goodwill premium and purchased goodwill are mismatched.
Option D → Multiple accounting treatments are incorrect.

🎯 Strategy

Used

Concept Matching

Application:

Associate each goodwill concept with its accounting treatment.

Final Logic:

Each goodwill-related item has a distinct accounting treatment.

🧠 Memory Trick

"Purchase–Asset, Self–No Asset, Premium–Sacrifice, Existing–Write Off."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Goodwill

19 When a new partner brings premium for goodwill but the partners decide to keep the amount invested in the business, the firm's Bank Balance will:

A Increase permanently by the amount of goodwill received.

B Decrease immediately after receipt.

C Remain unchanged.

D Become negative.

💡 Short Explanation

Goodwill is received in cash. It is not withdrawn by the partners. Therefore, the Bank Balance increases.

✅ Correct Answer Explanation

If the incoming partner brings goodwill in cash and the old partners do not withdraw it, the amount remains invested in the business. Consequently, the firm's Bank Balance increases by the amount of goodwill received, while the Capital Accounts of the sacrificing partners are credited. Hence, Option A is correct.

❓ Why Other Options Are Incorrect

Option B → No withdrawal occurs.
Option C → Cash has been received.
Option D → Bank Balance does not become negative.

🎯 Strategy

Used

Accounting Effect Analysis

Application:

Identify the effect of retaining goodwill in the business.

Final Logic:

Retained goodwill increases the firm's cash resources.

🧠 Memory Trick

"Keep Goodwill = Keep Cash."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Goodwill Retained

20 Goodwill is primarily valued at the time of admission of a new partner because it represents the firm's:

A Historical cost of fixed assets

B Future earning capacity and business reputation

C Total liabilities of the business

D Closing stock valuation

💡 Short Explanation

Goodwill reflects reputation. It indicates superior earning capacity. It compensates old partners during admission.

✅ Correct Answer Explanation

Goodwill is an intangible asset that represents the value of a firm's reputation, customer loyalty, efficient management, and future earning capacity. During the admission of a new partner, goodwill is valued so that the incoming partner compensates the old partners for sharing these existing advantages. Hence, Option B is correct.

❓ Why Other Options Are Incorrect

Option A → Goodwill is unrelated to the historical cost of assets.
Option C → Liabilities do not determine goodwill.
Option D → Closing stock is a current asset and not goodwill.

🎯 Strategy

Used

Concept Identification

Application:

Recognize the economic meaning of goodwill.

Final Logic:

Goodwill represents the firm's reputation and future profit-earning ability.

🧠 Memory Trick

"Goodwill = Good Name + Good Earnings."

📚 Class XII – Accountancy Part I – Reconstitution of a Partnership Firm – Admission of a Partner – Meaning and Valuation of Goodwill

CUET UG Accountancy Booster Test 2 Treatment of Goodwill

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