Goodwill: Nature and Valuation (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Goodwill: Nature and Valuation. Every question comes with the correct answer and an explanation.

Goodwill: Nature and Valuation (Class 12 Accountancy)

Practise chapter-wise MCQs for Class 12 Accountancy — Goodwill: Nature and Valuation. Every question comes with the correct answer and an explanation.

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TL;DR: Practise chapter-wise MCQs for Class 12 Accountancy — Goodwill: Nature and Valuation. Every question comes with the correct answer and an explanation.

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Practise chapter-wise MCQs for Class 12 Accountancy — Goodwill: Nature and Valuation. Every question comes with the correct answer and an explanation.

Goodwill: Nature and Valuation MCQs with Answers & Explanations

Q1. Which of the following is an indirect expenditure that may need to be adjusted for while calculating average profits?

  1. Interest on partner's loan ✓ (correct)
  2. Cost of raw materials
  3. Wages paid to workers
  4. Rent of the factory

Explanation: Interest on partner's loan is an appropriation of profit, not a direct business expense. It is usually added back to profits to arrive at a figure that reflects the operational profitability before such appropriations.

Q2. Which of the following is NOT a type of goodwill?

  1. Purchased Goodwill
  2. Inherited Goodwill ✓ (correct)
  3. Concealed Goodwill
  4. Self-generated Goodwill

Explanation: Inherited goodwill is not a recognized type of goodwill in accounting. Goodwill is either purchased or self-generated.

Q3. The Capitalisation of Super Profit Method calculates goodwill as:

  1. Average Profit × (100 / Normal Rate of Return)
  2. (Normal Profit / Super Profit) × 100
  3. (Super Profit / Normal Rate of Return) × 100 ✓ (correct)
  4. Super Profit × Number of Years of Purchase

Explanation: Under the Capitalisation of Super Profit Method, goodwill is calculated by capitalizing the super profit at the normal rate of return: Goodwill = (Super Profit / Normal Rate of Return) × 100.

Q4. When a new partner is admitted and goodwill is to be raised, the amount of goodwill credited to the old partners' Capital Accounts is based on:

  1. Their initial capital contribution
  2. Their sacrificing ratio
  3. Their gaining ratio
  4. Their profit-sharing ratio ✓ (correct)

Explanation: When goodwill is raised at its full value and then written off, it is distributed among the existing partners in their profit-sharing ratio, effectively compensating them for their past contributions to building that goodwill.

Q5. In the Annuity Method of goodwill valuation, the present value of future super profits is considered.

  1. True ✓ (correct)
  2. Only if the business is old
  3. False
  4. Only if the super profit is consistent

Explanation: The Annuity Method considers the time value of money by discounting future super profits to their present value, treating them as an annuity.

Q6. Which method of goodwill valuation is suitable when the business is expected to earn profits above the normal rate of return?

  1. Annuity Method
  2. Super Profit Method ✓ (correct)
  3. Average Profit Method
  4. Capitalisation of Profits Method

Explanation: The Super Profit Method is specifically designed to value goodwill when the business earns profits in excess of the normal rate of return.

Q7. Which factor does NOT influence the valuation of goodwill?

  1. Location of the business
  2. Efficient management
  3. Past losses of the business ✓ (correct)
  4. Reputation of the business

Explanation: While past losses are considered when calculating average profits, they do not directly influence the *concept* or *nature* of goodwill itself. Goodwill reflects future earning capacity. Location, reputation, and management are all factors that contribute to goodwill.

Q8. When goodwill is purchased, it is recorded in the books of accounts.

  1. Only at the time of dissolution
  2. Only if its value is substantial
  3. False
  4. True ✓ (correct)

Explanation: Purchased goodwill is an intangible asset that is recognized and recorded in the books of accounts as it has been acquired for a specific consideration.

Q9. Under the Average Profit Method, goodwill is calculated as:

  1. Average profit multiplied by the number of years of purchase ✓ (correct)
  2. Super profit multiplied by the number of years of purchase
  3. Total profit divided by the number of years of purchase
  4. Future maintainable profit multiplied by the number of years of purchase

Explanation: The formula for goodwill under the Average Profit Method is: Goodwill = Average Profit × Number of Years of Purchase.

Q10. Super profit is the difference between:

  1. Future profit and Normal profit
  2. Actual profit and Normal profit ✓ (correct)
  3. Actual profit and Average profit
  4. Normal profit and Average profit

Explanation: Super profit is defined as the excess of the actual or expected profits over the normal profits.

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