Change in Profit Sharing Ratio

Questions Bank

  • Any change in Existing Agreement of partnership agreement amounts to reconstitution, such reconstitution ends the existing agreement and new agreement comes into force and the firm continues.
    2018-02-12 17:01:14
  • At the time of change in profit sharing ratio, it is important to determine the sacrifice ratio and gaining ratio of partner, as it compensate sacrificing partner by paying him proportionate amount of goodwill.
    2018-02-12 17:01:02
  • Sacrificing Ratio, is the ratio in which partner(s) has/have agreed to sacrifce their share of profit in favour of other partner(s).
    Sacrifice Ratio = Old Ratio - New Ratio

    2018-02-12 17:00:51
  • Gaining Ratio, is the ratio in which the partner(s) has/have agreed to gain their share of profit from other partner(s).
    Gaining Ratio = New Ratio - Old Ratio
    2018-02-12 17:00:36
  • Para 16 of AS-10, states that goodwill can be recorded in the books only, if money or money's worth has been paid for it. This implies that goodwill will be recorded in the books only when it is purchased.
    2018-02-12 17:00:20
  • Accumulated Profits are such undistributed portion of profits over the years which have not been credited to partner’s capital/current accounts
    2018-02-12 17:00:04
  • Hidden Goodwill is the excess of desired total capital of the firm over the actual combined capital of all partners. It requires calculation of desired total capital
    on the basis of new partner’s capital for a given share. The difference between totalcapital and actual capital is hidden goodwill.
    2018-02-12 16:59:52
  • AS-10 and AS-26, in respect to treatment of goodwill are
    (i) Only purchased goodwill can be recorded in the books. (ii) At the time of reconstitution of partnership firm, goodwill a/c cannot be raised in the books.
    2018-02-12 16:59:34

  • 2018-02-12 16:58:45

Questions Bank -

Ans. Goodwill is an asset, which states the reputation of the business in the market.

Ans. The nature of goodwill is Intangible.

Ans. The two features of goodwill are:
(i) Intangible asset.
(ii) Subject to fluctuations.

Ans. Goodwill will be shown in the balance sheet only when it is purchased.

Ans. The valuation of goodwill arises.
(i) Admission of a partner.
(ii) Retirement of a partner.

Ans. The efficiency of management is high, a firm will earn high profits which will result in high goodwill valuation.

Ans. The business dealing in goods or having a stable demand will earn more profits.

Ans. The valuation of goodwill of the firm.
(i) Average Profits Method.
(ii) Super Profits Method.

Ans. Goodwill = Average profits x Number of years of purchase

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