MCQ on Valuation of Goodwill
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| MCQ on Valuation of Goodwill |
Following are the 19 MCQs on Valuation of Goodill which is important for Exams.
1. What is goodwill in accounting?
a) A liability
b) An intangible asset
c) A tangible asset
d) An expense
Answer: b) An intangible asset
2. Which of the following methods is NOT commonly used to calculate goodwill?
a) Average profit method
b) Super profit method
c) Market value method
d) Capitalization method
Answer: c) Market value method
3. The average profit method calculates goodwill by:
a) Multiplying average profits by the number of years' purchase
b) Adding super profit to average profits
c) Multiplying super profits by the number of years' purchase
d) Subtracting normal profits from average profits
Answer:a) Multiplying average profits by the number of years' purchase
4. The formula for goodwill under the super profit method is:
a) Super profits ÷ Rate of return
b) Super profits × Number of years' purchase
c) Average profits × Number of years' purchase
d) Total profits ÷ Number of years
Answer:b) Super profits × Number of years' purchase
5. Super profit is calculated as:
a) Total profit ÷ Number of years
b) Average profit − Normal profit
c) Normal profit − Average profit
d) Total profit − Normal profit
Answer:b) Average profit − Normal profit
6. Under the capitalization method, goodwill is calculated as:
a) Super profits × Number of years' purchase
b) Total profits × Number of years
c) Capitalized value of average profits − Net tangible assets
d) Average profits − Normal profits
Answer:c) Capitalized value of average profits − Net tangible assets
7. Which of the following is NOT required for the calculation of goodwill using the super profit method?
a) Average profits
b) Normal rate of return
c) Capital employed
d) Total liabilities
Answer:d) Total liabilities
8. If the average profit is ₹50,000, the normal rate of return is 10%, and capital employed is ₹400,000, what is the super profit?
a) ₹10,000
b) ₹50,000
c) ₹40,000
d) ₹45,000
Answer:a) ₹10,000
Calculation: Normal profit = Capital employed × Rate of return = ₹400,000 × 10% = ₹40,000
Super profit = Average profit − Normal profit = ₹50,000 − ₹40,000 = ₹10,000*
9. Goodwill calculated as a fraction of revenue is typically used in:
a) Partnership firms
b) Mergers and acquisitions
c) Sole proprietorship businesses
d) Public companies
Answer:c) Sole proprietorship businesses
10. The main purpose of calculating goodwill is to:
a) Calculate business taxes
b) Assess the business's current liabilities
c) Determine the value of intangible assets
d) Settle disputes among stakeholders
Answer:c) Determine the value of intangible assets
11. Which of the following factors DOES NOT affect the value of goodwill?
a) Location of the business
b) Quality of products or services
c) Number of employees
d) Market reputation
Answer:c) Number of employees
12. When goodwill is purchased, it is recorded in the books of accounts as:
a) A liability
b) A revenue expense
c) An intangible asset
d) A capital expense
Answer:c) An intangible asset
13. If average annual profits are ₹120,000, and goodwill is calculated based on 3 years' purchase, the goodwill will be:
a) ₹360,000
b) ₹240,000
c) ₹400,000
d) ₹300,000
Answer:a) ₹360,000
14. In the super profit method, if normal profit exceeds average profit, the goodwill value will be:
a) Positive
b) Negative
c) Zero
d) Cannot be determined
Answer:c) Zero
Explanation: Goodwill arises only when average profit exceeds normal profit.
15. In partnership accounts, goodwill is typically adjusted:
a) In the capital accounts of partners
b) In the profit and loss account
c) By revaluation of assets
d) By adjusting drawings
Answer:a) In the capital accounts of partners
16. Goodwill arises in which of the following situations?
a) The business earns a normal profit
b) The business earns a higher-than-normal profit
c) The business earns no profit
d) The business has no tangible assets
Answer:b) The business earns a higher-than-normal profit
17. The capitalization of super profit method calculates goodwill as:
a) Super profit × Rate of return
b) Super profit ÷ Rate of return
c) Average profit × Number of years' purchase
d) Super profit + Average profit
Answer: b) Super profit ÷ Rate of return
18. In the case of admission of a partner, goodwill is:
a) Written off in the old partners’ capital accounts
b) Credited to the new partner's capital account
c) Adjusted among the old partners in their sacrificing ratio
d) Adjusted among all partners equally
Answer:c) Adjusted among the old partners in their sacrificing ratio
19. If total profits for the last 4 years are ₹160,000, ₹200,000, ₹180,000, and ₹220,000, the average profit is:
a) ₹200,000
b) ₹190,000
c) ₹180,000
d) ₹210,000
Answer:b) ₹1,90,000
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