Q.A business has earned average profits of ₹1,00,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation average profits method, given that the value of net assets of the business is ₹8,20,000.

Showing the 12 most recent of 68 on this concept.

1. CBSE 2026Set 67/4/11 markMCQ
   Q.Assertion (A) : Goodwill is an intangible asset. Reason (R) : Goodwill is the value of the reputation of a firm in respect of profits expected in future over and above the normal profits. Choose the correct option from the following : (A) Both Assertion (A) and Reason (R) are correct and Reason (R) is the correct explanation of Assertion (A). (B) Both Assertion (A) and Reason (R) are correct, but Reason (R) is not the correct explanation of Assertion (A). (C) Assertion (A) is incorrect, but Reason (R) is correct. (D) Assertion (A) is correct, but Reason (R) is incorrect.

   ›Reveal solutionSolution

   Goodwill is indeed an intangible asset, and the reason given correctly explains why — it is the value of a firm’s reputation that generates above-normal future profits.

   Let’s begin with the assertion. In accounting, assets are classified as tangible or intangible. Tangible assets have physical substance — land, machinery, cash. Intangible assets do not; they are non-physical rights or advantages that bring economic benefit. Goodwill fits this definition perfectly: you cannot touch or see it, yet it has real value because it represents the firm’s ability to earn more than the average business in its industry. The NCERT textbook for Class 12 Accountancy (Part II) explicitly lists goodwill under “Intangible Assets” in the balance sheet format. So Assertion (A) is correct.

   Now the reason. Goodwill arises from a firm’s reputation — its brand name, customer loyalty, location, quality of products, and management efficiency. These factors allow the firm to earn super profits, i.e., profits above the normal rate of return expected in that line of business. The textbook defines goodwill as “the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits.” That is exactly what Reason (R) states. So Reason (R) is also correct.

   The key question is whether Reason (R) explains why goodwill is an intangible asset. Yes, it does. Goodwill is intangible precisely because it is not a physical object but a valuation of future earning power derived from reputation. The reason gives the nature of goodwill — its basis in expected future super profits — which is why it is classified as an intangible asset rather than a tangible one. Therefore, (R) is the correct explanation of (A).

   Important

   A common confusion is to think that because goodwill is “intangible,” any vague reason about reputation would do. But the NCERT specifically ties goodwill to future super profits — that is the core of its definition and the reason it is an asset at all.

   Thus, the correct option is (A): Both Assertion (A) and Reason (R) are correct, and Reason (R) is the correct explanation of Assertion (A).

   ✓Final answer

   In short, goodwill is an intangible asset because it represents the monetary value of a firm’s reputation that yields above-normal future profits — the reason directly explains the assertion.

2. CBSE 2026Set MARCH1 markMCQ
   Q.'Goodwill' is which type of asset?

   (a) Tangible asset

   (b) Intangible asset

   (c) Current asset

   (d) Fictitious asset

   ›Reveal solutionSolution

   Goodwill is an intangible asset, so the answer is (b).

   Assets are broadly tangible (having physical existence, like machinery) or intangible (having value but no physical form, like goodwill, patents, trademarks). Goodwill represents the extra earning power and reputation of a firm; it has a real, realisable money value and can be sold along with the business, which distinguishes it from a fictitious asset (such as preliminary expenses) that carries no realisable value.

   ✓Final answer

   (b) Intangible asset.

3. CBSE 2026Set MARCH1 markMCQ
   Q.Which method is appropriate for the computation of goodwill when profit of every year is increasing?

   (a) Simple average

   (b) Weighted average

   (c) Annual growth rate

   (d) Compound growth rate

   ›Reveal solutionSolution

   For a steadily rising profit trend, the weighted average profit method is appropriate, so the answer is (b).

   Under the simple average method every year's profit gets equal importance, which understates goodwill when profits are on an upward trend. The weighted average method assigns increasing weights (1, 2, 3, ...) to successive years so that the most recent, higher profits influence the average more. This reflects the likely future earning capacity better whenever profits are consistently increasing (or decreasing).

   ✓Final answer

   (b) Weighted average.

4. CBSE 2026Set MARCH1 mark
   Q.What is weighted average profit?

   ›Reveal solutionSolution

   Weighted average profit gives greater importance to recent profits while averaging past profits for goodwill valuation.

   Weighted average profit is used to value goodwill when profits show a rising or falling trend. Each year's profit is multiplied by a weight (normally 1 for the earliest year, increasing to the highest weight for the most recent year). The sum of these products is then divided by the sum of the weights.

   Weighted average profit = Total of (Profit x Weight) / Total of weights

   Because recent years carry higher weights, this figure reflects the firm's latest earning capacity better than a simple average, which is important for GSEB Class-12 goodwill sums.

   ✓Final answer

   It is the average of past profits computed by weighting each year's profit (highest weight to the latest year) and dividing the total of Profit x Weight by the total of the weights.

5. CBSE 2026Set ANNUAL1 mark
   Q.Fill in the blank: The cash or non-cash item bought by a new partner to acquire a share in the firm's profit are called __________. (Capital/Goodwill (Premium))

   ›Reveal solutionSolution

   The amount a new partner brings to acquire a share in profits is goodwill (premium).

   On admission, an incoming partner acquires a share of future profits that the existing partners sacrifice. To compensate them, the new partner brings in an extra amount (in cash or in kind) called goodwill or premium for goodwill. This is separate from the capital the new partner contributes for their stake in the firm's net assets.

   ✓Final answer

   It is called Goodwill (Premium).

6. CBSE 2026Set ANNUAL1 markMCQ
   Q.Weighted average method of calculating goodwill is used when

   (a) Profit is equal

   (b) Profit has increasing trend

   (c) Profit has decreasing trend

   (d) Both (A) and (B)

   ›Reveal solutionSolution

   The weighted average method is used when profits show an increasing (or definite) trend - option (b).

   Under the simple average method all years' profits carry equal weight. But when profits are rising (or show a clear trend), recent years are a better guide to future earnings, so the weighted average method is used - higher weights are assigned to the later years. Hence it is used when profits have an increasing trend (more generally, a definite upward or downward trend).

   ✓Final answer

   (b) Profit has increasing trend.

7. CBSE 2026Set ANNUAL1 markMCQ
   Q.Which of the following is not correct for goodwill?

   (a) It is an intangible asset

   (b) It is a fictitious asset

   (c) It may have a realizable value

   (d) It is amortized

   ›Reveal solutionSolution

   Goodwill is a genuine intangible asset with real (realizable) value — calling it a "fictitious asset" is incorrect, which is exactly why that is the right choice for "not correct."

   Goodwill is the value of a firm's reputation, built up over years through good customer relationships, locational advantage, quality of products/services, or efficient management — it allows the firm to earn profits above what a similarly placed new business could normally earn.

   Checking each statement:

   • "It is an intangible asset" — TRUE. Goodwill cannot be seen or touched, but it is nonetheless a genuine asset reflected on the Balance Sheet.
   • "It is a fictitious asset" — FALSE. A fictitious asset (e.g., discount on issue of shares/debentures, or preliminary expenses not yet written off) has no real/realizable value — it is merely a deferred revenue expenditure carried forward on the asset side. Goodwill is the opposite: it has genuine economic value and can be sold.
   • "It may have a realizable value" — TRUE. When a business (or a partner's share in it) is sold, goodwill is often sold along with it for real money — e.g., an incoming partner pays a real premium for goodwill.
   • "It is amortized" — Broadly considered TRUE in the way goodwill is treated for accounting purposes at this syllabus level (existing goodwill in the books is written off/adjusted over the partners' capital accounts on reconstitution), unlike a permanent asset that's never reduced.

   Since the question asks for the statement that is not correct, "It is a fictitious asset" is the odd one out.

   ✓Final answer

   Option (b) "It is a fictitious asset" — this is incorrect because goodwill is a genuine intangible asset with real/realizable value, unlike true fictitious assets which have none.

8. CBSE 2026Set ANNUAL1 mark
   Q.A firm earned profits/losses over the past four years as follows: 2021–22 ₹9,000; 2022–23 ₹5,000; 2023–24 ₹4,000 (Loss); 2024–25 ₹6,000. Calculate the value of Goodwill on the basis of two years' purchase of average profit of past four years.

   ›Reveal solutionSolution

   Averaging the four years' results (including the one loss year) gives ₹4,000; at 2 years' purchase, Goodwill = ₹8,000.

   Under the Average Profit Method, Goodwill = Average Profit × Number of Years' Purchase. The average must be taken over all the years given, treating any loss as a negative figure (it genuinely reduces the average, since it reflects the firm's real earning record over that period).

   Profits/(Losses) over the four years:

   • 2021–22: ₹9,000
   • 2022–23: ₹5,000
   • 2023–24: (₹4,000) — a loss
   • 2024–25: ₹6,000

   Total = 9,000 + 5,000 − 4,000 + 6,000 = ₹16,000

   Average Profit = Total / Number of years = 16,000 / 4 = ₹4,000

   Goodwill = Average Profit × Number of Years' Purchase

   = ₹4,000 × 2

   = ₹8,000

   ✓Final answer

   Goodwill = ₹8,000 (Average Profit ₹4,000 × 2 years' purchase).

9. CBSE 2025Set MARCH1 markMCQ
   Q.Goodwill depends on which aspect.

   (a) On employee of business enterprise

   (b) On management of business enterprise

   (c) On assets of business enterprise

   (d) On future maintainable profit

   ›Reveal solutionSolution

   Goodwill depends mainly on the firm's future maintainable profit, because a buyer pays for the earning capacity that will continue. Correct option: (d).

   In GSEB Class-12 Commerce Accountancy, goodwill is the monetary value of the reputation/earning capacity of a business.

   • Employees, management and assets all contribute to earning capacity, but goodwill is ultimately valued on the profit the firm is expected to keep earning — the future maintainable profit.

   • Methods of valuation (average profit, super profit, capitalisation) all start from expected/future maintainable profit.

   ✓Final answer

   (d) On future maintainable profit.

10. CBSE 2025Set MARCH1 markMCQ
    Q.Internally generated goodwill cannot be shown in the books as per which accounting standard?

    (a) 25

    (b) 26

    (c) 27

    (d) 28

    ›Reveal solutionSolution

    Internally generated goodwill cannot be recorded as per AS-26 (Intangible Assets). Correct option: (b) 26.

    In GSEB Class-12 Commerce Accountancy:

    • AS-26 governs intangible assets and states that only purchased goodwill (paid for) can be recorded.

    • Internally/self-generated goodwill cannot be reliably measured at cost, so it is not shown in the books.

    • (AS-25 = interim financial reporting, AS-27 = joint ventures, AS-28 = impairment — none deal with this rule.)

    ✓Final answer

    (b) 26.

11. CBSE 2025Set MARCH1 mark
    Q.Goodwill is an ________ asset.

    ›Reveal solutionSolution

    Goodwill is an INTANGIBLE asset.

    Goodwill represents the reputation, customer loyalty and earning capacity a firm has built over time. Because it has no physical existence (it cannot be seen or touched) but still carries a monetary value that can be bought or sold when a firm is reconstituted, it is classified as an intangible fixed asset (as against tangible assets like machinery or buildings).

    ✓Final answer

    Intangible.

12. CBSE 2025Set ANNUAL1 markMCQ
    Q.Which of the following is a nature of goodwill ? (A) Rat goodwill (B) Cat goodwill (C) Dog goodwill (D) All of these

    ›Reveal solutionSolution

    Goodwill is classified by how loyally customers stay with the business into cat, dog and rat (and rabbit) goodwill. Since all three listed are genuine classifications, the answer is (D) All of these.

    For Bihar Class-12 (BSEB Inter) commerce students, the traditional "animal" classification of goodwill describes how firmly customers are attached to a business rather than to a person or place:

    • Cat goodwill: customers are loyal to the place/firm; the most stable and valuable goodwill.
    • Dog goodwill: customers are loyal to the person (owner/manager); it may leave when that person leaves.
    • Rat goodwill: customers are casual and inconsistent, attached to neither place nor person; the least valuable.
    • (Rabbit goodwill: customers come only because they live very near the business.)

    Since cat, dog and rat goodwill are all recognised natures of goodwill, every option listed is correct.

    ✓Final answer

    (D) All of these.