Goodwill & Change in PSR

1. Which of the following is NOT true in relation to goodwill?

a. It is an intangible asset
b. It is fictitious asset
c. It has a realizable value
d. None of the above

2. The net assets of a firm including fictitious assets of Rs.15,000 are Rs.105,000. The net
liabilities of the firm are Rs.20,000. The normal rate of return is 10% and the average
profits of the firm are Rs. 9,000. Calculate the goodwill as per capitalization of super
profits.
a. 20,000
b. 25,000
c. 22,000
d. None

3. The average capital employed of a firm is Rs.4,00,000 and the normal rate of return is
15%. The average profit of the firm is Rs.80,000 per annum. If the remuneration of
the partners is estimated to be Rs. 10,000 per annum, then on the basis of two years
purchase of super-profit, the value of the Goodwill will be:
a. 10,000
b. 20,000
c. 60,000
d. 80,000

4. Weighted average method of calculating goodwill is used when

a. Profits are not equal
b. Profits show an increasing or decreasing trend
c. Profits are Fluctuating
d. None of the Above

5. As per which Accounting Standard, self-generated goodwill is not recorded in the books
a. AS 25
b. AS 26
c. AS 27
d. AS 16
6. Profits for the year 2019-20 and 2020-21 are Rs. (50,000) & Rs. 55,000. It was found
that closing stock of the year 2019-20 was undervalued to the extent of Rs. 10,000 and
closing stock of 2020-21 was overvalued by Rs. 15,000. Normal profit for the year 2020-
21 would be:
a. 60,000
b. 30,000
c. 45,000
d. 50,000

7. Which item is not considered while calculating the capital employed?

a. Trade investments
b. Reserves
c. Fictitious Assets
d. Both a and c

8. On 1st April 2020, firm had assets of Rs. 2,50,000 including Advertisement suspense
of Rs. 50,000 and Trade investment of Rs. 15,000. Capital of the partners amounted
to Rs. 2,00,000, Reserves of Rs. 20,000 and creditors of Rs. 30,000. What is the
amount of capital employed?
a. 2,20,000
b. 1,70,000
c. 1,65,000
d. 1,80,000

9. A and B are partners sharing profits and losses in the ratio of 5 : 3. On 1st April, 2020,
C is admitted to the partnership for 1/4th share of profits. For this purpose, goodwill
is to be valued at two years' purchase of average of last three years' profits (after allowing
partners' remuneration). Net profit before partners' remuneration were: 2017-18 : ₹
2,00,000; 2018-19 : ₹ 2,30,000; 2019-20 : ₹ 2,60,000. The remuneration of the partners
is estimated to be ₹ 50,000 p.a each. What is the amount of goodwill?
a. 2,60,000
b. 2,50,000
c. 2,70,000
d. 2,80,000
10. Profit for the year ended 31st March 2021 amounting to 70,000 includes insurance
claim received Rs. 18,000, dividend received Rs. 8,000 and excludes insurance
premium expenses of Rs. 10,000. Calculate the normal business profit.
a. 44,000
b. 34,000
c. 54,000
d. None

11.P and Q were partners sharing profits and losses in the ratio of 3 : 2. They decided that
with effect from 1st April, 2021 they would share profits and losses in the ratio of 5 :3.
Goodwill is valued at Rs. 1,28,000. In adjustment entry:
a. Cr. P by Rs. 3,200; Dr. Q by Rs. 3,200
b. Cr. P by Rs.37,000; Dr. Q by Rs.37,000
c. Dr. P by Rs.37,000; Cr. Q by Rs.37,000
d. Dr. P by Rs. 3,200 Cr. Q by Rs. 3,200

12.X, Y and Z are partners in a firm sharing profits in the ratio of 3 : 2 : 1. They decided
to share future profits equally. The Profit and Loss Account showed a Credit balance
of Rs.30,000 and a General Reserve of Rs.60,000. If these are not to be shown in
balance sheet, in the journal entry:
a. Cr. X by Rs. 15,000; Dr. Z by Rs. 15,000
b. Dr. X by Rs. 15,000; Cr. Z by Rs. 15,000
c. Cr. X by Rs.45,000; Cr. 7 by Rs.30,000; Cr. Z by Rs. 15,000
d. Cr. X by Rs.30,000; Cr. 7 by Rs.30,000; Cr. Z by Rs.30,000

13. Profit for the year ended 31st March 2021 amounts to Rs. 1,50,000. On 1st July, 2020,
a car costing Rs. 1,00,000 was purchased but debited to normal repair expenses.
Depreciation @ 10% p.a. SLM is to be charged. Calculate the normal business profit
for the current FY.
a. 2,42,500
b. 2,50,000
c. 2,40,000
d. None
14. Extract of Balance sheet
Liabilities Amount Assets Amount
Debtors 4,00,000
Less: Provision for
Doubtful debts (20,000) 3,80,000

Provision to be maintained @ 10% at the time of change in PSR. What is the amount
credited / debited in revaluation A/c?
a. Debit Rs. 40,000
b. Credit Rs. 40,000
c. Credit Rs. 20,000
d. Debit Rs. 20,000

15. Extract of Balance sheet

Liabilities Amount Assets Amount
Debtors 4,00,000
Less: Provision for
Doubtful debts (20,000) 3,80,000

At the time of change in PSR, it was noticed that there are Bad debts of Rs. 15,000 and
it was agreed that provision to be maintained @ 10% of Debtors. What is the amount
credited / debited in revaluation A/c?
a. Debit 33,500
b. Debit 55,000
c. Debit 38,500
d. None

16. Extract of Balance sheet

Liabilities Amount Assets Amount
Debtors 4,00,000
Less: Provision for
Doubtful debts (20,000) 3,80,000

At the time of change in PSR, it was noticed that there are Bad debts of Rs. 25,000 and
it was agreed that provision to be maintained @ 10% of Debtors. What is the amount
credited / debited in revaluation A/c?
a. Debit 37,500
b. Debit 42,500
c. Debit 65,000
d. Debit 62,500
17.A, B and C are partner sharing profits in the ratio of 1 :2 : 3. On 1-4-2021 they decided
to share the profits equally. On the date there was a credit balance of Rs. 1,20,000 in
their Profit and Loss Account and a balance of Rs. 1,80,000 in General Reserve
Account. Instead of closing the General Reserve Account and Profit and Loss Account,
it is decided to record an adjustment entry for the same. In the necessary adjustment
entry to give effect to the above arrangement:
a. Dr. A by Rs.50,000; Cr. B by Rs.50,000
b. Cr. A by Rs.50,000; Dr. B by Rs.50,000
c. Dr. A by Rs.50,000; Cr. C by Rs.50,000
d. Cr. A by Rs.50,000; Dr. C by Rs.50,000

18.A, B and C are partners sharing profits and losses in the ratio of 5 : 4 : 1. Calculate new
profit- sharing ratio if C acquires 1/10th share of A and 1/2 share of B
a. 9:4:7
b. 4:3:3
c. 3:4:3
d. None

19. X, Y and Z are partners sharing profits and losses in the ratio of 5 : 3 : 2, decided to
share
future profits and losses equally with effect from 1st April, 2021. On that date, the
goodwill appeared in the books at ₹ 12,000. But it was revalued at ₹ 30,000. Assuming
that goodwill will not appear in the books of the accounts, calculate the net effect of
the journal entries on X’s capital account:
a. X credited by 1,000
b. No effect
c. X credited by 2,000
d. X debited by 1,000

20. A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide
to share future profits and losses in the ratio of 2 : 3 : 5. There is a 'Workmen
Compensation Reserve' of ₹ 2,00,000 at the time of change in profit-sharing ratio, and
a claim of ₹160,000 against it. What would be the effect of the above transaction on
X’s capital account:
a. Credited by 24,000
b. Debited by 24,000
c. Credited by 20,000
d. None
 21. A, B and C who are presently sharing profits and losses in the ratio of 5 : 3 : 2 decide
to share future profits and losses in the ratio of 2 : 3 : 5. 'Investments Fluctuation
Reserve' of ₹ 20,000 was appearing at the time of change in profit-sharing ratio, when
investment (market value ₹ 95,000) appears in the books at ₹ 1,00,000. Effect of the
above transaction on B’s capital A/c:
a. Credited by 3,000
b. Credited by 4,500
c. Credited by 6,000
d. None

22. Investment fluctuation reserve is a reserve created out of profits to meet the …………
in ………… value of investments
a. Rise; book
b. Fall; book
c. Rise; market
d. Fall; market

23. At the time of change in profit sharing ratio, a debtor whose dues of Rs. 20,000 were
written off as bad debts, paid Rs. 15,000 in full settlement. Journal entry would be:
a. Bad debts A/c Dr. 5,000
To Revaluation A/c 5,000
b. Revaluation A/c Dr. 5,000
To Bad debts A/c 5,000
c. Bad debts Recovered A/c Dr. 15,000
To Revaluation A/c 15,000
d. None

24. At the time of change in PSR, what will be the impact on revaluation account if
Machinery shown in the balance sheet at Rs. 1,20,000 is undervalued by 25%.
a. Debit Rs. 30,000
b. Credit Rs. 30,000
c. Credit 40,000
d. Debit 40,000

Case Study (25-28)

Balance Sheet of X and Y, who share profits and losses as 5 : 3, as at 1st April, 2021 is:
 Amount Amount
Liabilities Assets
(₹) (₹)
X's Capital 52,000 Goodwill 8,000
Y's Capital 54,000 Machinery 38,000
General Reserve 4,800 Furniture 15,000
Sundry Creditors 5,000 Sundry Debtors 33,000
Employees' Provident 1,000 Stock 7,000
Fund
Workmen 10,000 Bank 25,000
Compensation Reserve
Advertisement 800
Suspense A/c

1,26,800 1,26,800

On the above date, they decided to change their profit-sharing ratio to 3 : 5 and agreed
upon the following:
(a) Goodwill be valued on the basis of two years' purchase of the average profit of the
last three years. Profits for the years ended 31st March, are: 2018-19 − ₹ 7,500; 2019-20 − ₹
4,000; 2020-21 − ₹ 6,500.
(b) Machinery and Stock be revalued at ₹ 45,000 and ₹ 8,000 respectively.
(c) Claim on account of workmen compensation is ₹ 6,000.
(d) Provision for doubtful debts to be created @ 10%.
(e) Furniture is overvalued by 20%

25.What will be the treatment of Goodwill mentioned in the Balance sheet?

a. Credited to partners’ capital account in their sacrificing ratio
b. Debited to partners’ capital account in their old ratio
c. Debited to partners’ capital account in their new ratio
d. Credited to partners’ capital account in their old ratio

26. What will be the treatment of Goodwill provided in the adjustments?

a. X will be debited by Rs. 3,000 & Y will be credited by Rs. 3,000
b. X will be credited by Rs. 3,000 & Y will be debited by Rs. 3,000
c. X will be debited by Rs. 3,750 & Y will be credited by Rs. 3,750
d. None
27. What will be the treatment of workmen compensation reserve?
a. X will be credited by 6,250 and Y will be credited by 3,750
b. X will be credited by 2,500 and Y will be credited by 1,500
 c. X will be credited by 2,000 and Y will be credited by 2,000
d. None

28.What will be the profit or loss on revaluation?

a. Profit of Rs. 950
b. Profit of Rs. 1,700
c. Loss of Rs. 5,050
d. None

29. Assertion (A): When partners decide not to distribute the reserves and profits, no
treatment is done in the partners’ capital account.
Reason(R): Adjustment entry is passed in case reserves and profits are to be shown in
the balance sheet i.e., gaining partners’ capital account is debited and sacrificing
partners’ capital account is credited.
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. R is true but A is false

30. Calculate goodwill by capitalization of average profit when:

Average capital employed is Rs. 6,00,000
Average profit is Rs. 1,80,000
Remuneration to partners of Rs. 1,00,000
Normal rate of return – 10%
a. Rs. 2,00,000
b. Rs. 5,00,000
c. Rs. 6,00,000
d. None

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