Question 28 of 43
Q.(a) State the differences between Fixed Capital method and Fluctuating Capital method.
(OR)
(b) From the following information relating to Arul Enterprises, calculate the value of goodwill on the basis of 2 years purchase of the average profits of 3 years.
(i) Profits for the years ending 31st December 2016, 2017 and 2018 were ₹ 46,000, ₹ 44,000 and ₹ 50,000 respectively.
(ii) A non-recurring income of ₹ 5,000 is included in the profits of the year 2016.
(iii) The closing stock of the year 2017 was overvalued by ₹ 10,000.
Puducherry TnboardTamil Nadu HSC (DGE) Commerce Board 2023Subjective· 5mImportance★★★★★
65% · 28/43 Questions
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Start your 14-day free trial to unlock the full solution →(a) Fixed vs fluctuating capital differ in number of accounts, whether the balance changes, where adjustments go, and closing balances. (b) Adjusted average profit ₹45,000 × 2 years = goodwill ₹90,000.
(a) Fixed capital method vs Fluctuating capital method
| Basis | Fixed Capital Method | Fluctuating Capital Method |
|---|---|---|
| Number of accounts | Two per partner — Capital A/c and Current A/c | Only one — Capital A/c |
| Change in capital balance | Capital balance remains fixed (unchanged) year to year | Capital balance keeps fluctuating (changes) every year |
| Where adjustments are recorded | Interest on capital/drawings, salary, share of profit etc. go to the Current A/c | All such adjustments go into the single Capital A/c itself |
| Closing balance | Capital A/c always shows a credit balance; Current A/c may be debit or credit | Capital A/c may show a debit or credit balance |
| Explicit mention in deed | Followed only when the partnership deed specifically provides for it | Followed when the deed is silent (the usual/default method) |
(b) Goodwill of Arul Enterprises (2 years' purchase of 3 years' average profit)
Step 1 — Adjust each year's profit.
- 2016: ₹46,000 includes a non-recurring income ₹5,000 → deduct → 41,000.
- Closing stock of 2017 overvalued by ₹10,000 → this overstates 2017 profit → deduct ₹10,000 from 2017. The same stock is the opening stock of 2018, so its overvaluation understates 2018 profit → add ₹10,000 to 2018.
- 2017: 44,000 − 10,000 = 34,000.
- 2018: 50,000 + 10,000 = 60,000.
| Year | Given profit (₹) | Adjustment (₹) | Adjusted profit (₹) |
| --- | --- | --- | --- | …
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