Chapter MCQ Test 2 — Goodwill: Nature and Valuation
10 Questions • 12 min • Chapter MCQ
12:00
Question 1 of 10
Profits: 2021 Rs 80,000, 2022 Rs 1,00,000, 2023 Rs 1,20,000. Using weights 1, 2 and 3, the weighted average profit is:
Rs 1,06,667
Rs 1,00,000
Rs 1,20,000
Rs 90,000
Explanation: (80,000×1 + 1,00,000×2 + 1,20,000×3)/(1+2+3) = 6,40,000/6 = 1,06,667.
Question 2 of 10
A firm's average profit is 90,000; capital employed 6,00,000; normal rate 10%. By the super profit method at 4 years' purchase, goodwill is:
Rs 1,20,000
Rs 3,60,000
Rs 90,000
Rs 30,000
Explanation: Normal 60,000; super 30,000; goodwill = 30,000 × 4 = 1,20,000.
Question 3 of 10
Why does the super profit method give a lower goodwill than capitalising average profit, other things equal?
It values only the excess over normal profit, not the whole earning capacity
It ignores profit
It uses a higher rate
They are always equal
Explanation: Super profit isolates only the abnormal earning, whereas capitalising average profit reflects the firm's whole value before deducting net assets.
Question 4 of 10
Average profit 75,000; normal rate 12.5%; net assets 5,00,000. Goodwill by capitalisation of average profit is:
Rs 1,00,000
Rs 75,000
Rs 6,00,000
Nil
Explanation: Capitalised value = 75,000 × 100/12.5 = 6,00,000; goodwill = 6,00,000 − 5,00,000 = 1,00,000.
Question 5 of 10
Super profit 24,000 capitalised at a normal rate of 12% gives goodwill of:
Rs 2,00,000
Rs 2,880
Rs 24,000
Rs 1,20,000
Explanation: Goodwill = 24,000 × 100/12 = 2,00,000.
Question 6 of 10
When recent profits are clearly rising, the most appropriate method is the:
Weighted average profit method (more weight to recent years)
Simple average ignoring the trend
Capital method
No valuation
Explanation: Weighting recent years reflects the upward trend that a buyer would pay for.
Question 7 of 10
While computing average profit, an abnormal LOSS by fire of 20,000 included in one year's profit should be:
Added back (it is non-recurring)
Deducted again
Ignored
Doubled
Explanation: Abnormal, non-recurring losses are added back to find the true maintainable profit.
Question 8 of 10
A non-trade investment income of 5,000 is included in profit. For goodwill based on TRADING super profit it should be:
Excluded from profit (and the investment from capital employed)
Added twice
Kept in
Treated as goodwill
Explanation: Non-trade items are removed so that goodwill reflects only the trading earning capacity.
Question 9 of 10
Capital employed 8,00,000; normal rate 10%; goodwill (super profit, 3 yrs) is 90,000. The super profit must have been:
Rs 30,000
Rs 90,000
Rs 80,000
Rs 10,000
Explanation: Goodwill = super profit × 3 → super profit = 90,000/3 = 30,000.
Question 10 of 10
Self-generated goodwill is NOT recorded in the books mainly because:
AS-26 permits recording goodwill only when paid for (purchased)
It has no value
It is a liability
It is illegal to value it
Explanation: AS-26 allows recognition of goodwill only when a consideration has been paid, i.e. purchased goodwill.