Goodwill MCQ Questions on Average Profits Method- Partnership accounts
This MCQ Test on the average profit method for goodwill valuation has 15 practice questions. Test your knowledge about the partnership accounts - average profit method, how to calculate normal profits, adjustments made while calculating average profits etc. The quiz suits well for conceptual clarity for your board exams
CBSE class 12 accountancy MCQ questions
The below MCQ test is designed as per the latest syllabus prescribed by CBSE board. With the rise in weightage of MCQ questions, the practice of MCQ questions becomes very important. The quiz is equally useful for students of CUET exams.
How to attempt the quiz
One by one go through the below questions and select the right option. Do all the questions and in the end press submit. Instantly you will get your score and the explanation against each question. Go through your mistakes and reattempt the quiz any number of times as needed.
MCQ Quiz - Practice Questions
MCQ Quiz
Question 1
What does "Normal Business Profit" mean under Average Profit Method?
A
Correct Answer: Profit after adjusting abnormal items and non-business income/expenses
Normal Business Profit is adjusted for abnormal gains/losses, non-business income/expenses to reflect true business earnings.
Question 2
What are abnormal losses that need to be added back to profit under average profit method for goodwill valuation?
A
Correct Answer: Loss by fire, theft, or accident
Abnormal losses like fire, theft are one-time events, not expected in future, so added back to determine normal profit.
Question 3
Under Average Profit Method, profit on sale of fixed asset should be:
B
Correct Answer: Deducted from the profit
Profit on sale of fixed asset is non-business income and not recurring, hence deducted from profit.
Question 4
What is meant by "Number of Years' Purchase", while valuing Goodwill of a partnership firm ?
A
Correct Answer: Number of years profit is likely to be earned at same level without extra efforts
It represents the period for which goodwill benefit (past efforts) will continue to generate similar profits.
Question 5
While valuing Goodwill of a partnership firm, Abnormal gains should be:
B
Correct Answer: Deducted from the profit
Abnormal gains are non-recurring and won't occur in future, hence deducted to find normal business profit.
Question 6
For goodwill valuation , If closing stock is overvalued, the adjustment to profit should be:
B
Correct Answer: Deduct from profit
Overvaluation of closing stock increases profit artificially, so it must be deducted to get true profit.
Question 7
For goodwill valuation , If opening stock is undervalued, the adjustment to profit should be:
B
Correct Answer: Deduct from profit
Undervaluation of opening stock increases profit, so it should be deducted to determine correct profit.
Question 8
Capital expenditure wrongly charged as revenue expense should be:
A
Correct Answer: Added back to profit
Capital expenditure wrongly expensed reduces profit incorrectly, so it's added back to normal profit.
Question 9
Non-recurring expenses should be:
A
Correct Answer: Added back to profit
Non-recurring expenses won't occur in future, so added back to determine maintainable future profit.
Question 10
Management cost (Partners' remuneration) if not already deducted should be:
B
Correct Answer: Deducted from profit
Partners' remuneration represents value of their services and is an expense, hence deducted if not already done.
Question 11
Insurance premium on assets if not paid in a year should be:
C
Correct Answer: Deducted from that year's profit
Regular recurring expenses like insurance must be deducted even if not paid to reflect true normal profit.
Question 12
Under Weighted Average Profit Method, which year gets the highest weight?
C
Correct Answer: Most recent year
Recent year profits are more relevant indicators of future performance, hence given highest weight.
Question 13
The formula for calculating simple average under Simple Average Profit method is:
A
Correct Answer: Sum of Normal Profits ÷ Number of Years
Simple average is calculated by dividing total of normal business profits by number of years considered.
Question 14
The formula for calculating goodwill under Average Profit Method is:
A
Correct Answer: Average Profit × Number of Years' Purchase
Goodwill is determined by multiplying average normal business profit by agreed number of years' purchase.
Question 15
Under Weighted Average Method, the each year weighted profit is calculated by:
A
Correct Answer: Normal Profit × Weight assigned
Each year's normal profit is multiplied by its assigned weight to get weighted profit for that year.
