GOODWILL MCQ CLASS 12

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Goodwill is an intangible asset which enables a firm to earn higher profit than the normal profit earned by the other firms in the industry. Goodwill is created through the sincere and honest efforts made by the partners in the past. The goodwill so generated is known as internally i.e. Self Generated Goodwill. Treatment of Goodwill on the Admission of Partner is done to compensate the sacrificing partners by the new partner who acquires the share in future profits. Payment of premium for goodwill is mode of compensating the sacrificing partners for the sacrifice they make in favor of the new partner

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Goodwill is an intangible asset. It is the present value of the expected future income that is in excess of normal return on the investment in tangible assets.

FEATURES OF GOODWILL

•Intangible asset.

•Does not have existence separate from the business.

•Helps in earning higher profits.

•Attractive force which brings in customers regularly to the place of the business.

•Subjective Concept

NATURE OF GOODWILL

•Valuable asset.

•AS-26 deals with Intangible Assets.

•AS-26 prescribes that goodwill should not be recognized in the books of accounts unless consideration is paid for it.

•Self-generated goodwill is not recognized in the books of the accounts.

NEED FOR VALUING GOODWILL

The need for the valuation for goodwill arises:

•When there is a change in the profit-sharing ratio.

•When a new partner is admitted.

•When a new partner retires or dies.

•When partnership firm is sold as a going concern.

•When two or more firms amalgamate.

•When a partnership firm is converted into a company. •

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FACTORS AFFECTING GOODWILL

•Efficient Management
•Competent, experienced and capable management earns more profits, thereby increases the goodwill of the firm.

•Favorable Location

•More will be the goodwill if business is located at favorable place.

•Favorable Contracts

•Long-term contracts for sale and purchase of goods at favorable prices increases the goodwill of the firm.

•Longer Establishment of Business

•Long life business has extensive customer base resulting in higher sale and profit.

Advantages of Patents

•Firm which possesses the necessary patents will have better value for goodwill.

•Access to Supplies

•Firm having good arrangement of regular supplies can provide regular supply of goods and can enhance the goodwill of firm.

•Quality

•Firm will have good reputation if it is selling quality goods in the market fit for use by consumers.

•Market situation

Nature of business

•If nature of goods dealt in by business have high demand and also the product is not short of supply, it will lead to increase in profit as well as increase in goodwill.

Past Performance

•Firms earning higher profits year after year, will have better value for goodwill as compared to firms earning lesser profits or incurring losses with similar amount of capital employed.

Other factors

•After sale services, Good Customer relations, Good labor relations etc.

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CLASSIFICATION OF GOODWILL

PURCHASED GOODWILL

Purchased goodwill is the goodwill for which consideration has been paid for.

The excess of purchase consideration over value of net assets is goodwill.

Features of goodwill:

•Normally arises on the purchase of business.

•Since consideration is paid for it, it is recognized in the books of accounts.

•Shown in the Balance Sheet as an asset.

•Subjective assessment but ascertained when both purchaser and seller agree to its valuation. Amortized at earliest but not later than estimated useful life.

SELF GENERATED GOODWILL

•Goodwill which is not purchased for a consideration but is earned by the efforts of the management.

•Internally generated and arises because of number of factors such as location of business, nature of business, efficiency of management etc.

Features of self-generated Goodwill

•Generated internally, generally over the years.

•Valuation is subjective assessment, not based on the evidence. •As per AS-26, self generated goodwill is not recognized as the asset.

Table of Contents

1. Goodwill is defined as

A) Intangible asset

B) Fictitious asset

C) Current asset

D) Liquid asset
ANSWER:- A

2. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called

A) Surplus

B) Super Profit

C) Reserve

D) Goodwill
ANSWER:- D

3. A firm’s goodwill is not affected by

A) Location of the firm

B) The reputation of the Firm

C) Better Customer Service

D) None of the Above
ANSWER:- D

4. Following are the factors affecting goodwill except:

(a)Nature of business

(b)Efficiency of management

(c)Technical know how

(d)Location of the customers
ANSWER:- C

TRUE/ FALSE

5. Location of business does not affect the goodwill of business.(FALSE)

6. Goodwill can be sold in part.(FALSE)

7. Purchased goodwill may arise on acquisition of an existing business concern.(TRUE)

8. Self-Generated goodwill is recorded in the books of accounts as some consideration is paid for it .(FALSE)

GOODWILL MCQ CLASS 12

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