This MCQ Test on the capitalization method for goodwill valuation has 20 practice questions. Test your knowledge about the partnership accounts - capitalization method, two different methods capitalization of average profits method and capitalization of super profits method , how to calculate capital employed, normal rate of return etc. The quiz suits well for conceptual clarity for your board exams
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.
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
Question 1
Which of the following is the correct formula for capitalisation of average profit method?
Goodwill = Capitalised Value of Firm - Net Assets
Goodwill = Net Assets - Capitalised Value
Goodwill = Average Profit × Number of Years
Goodwill = Super Profit × 100 ÷ Normal Rate
A
Correct Answer: Goodwill = Capitalised Value of Firm - Net Assets
Under capitalisation of average profit method, goodwill is calculated by deducting net assets from capitalised value of the firm.
Question 2
Capitalised value of a business is ascertained by capitalising which of the following at normal rate of return?
Revenue
Turnover
Average Profit
Losses
C
Correct Answer: Average Profit
Capitalised value is determined by capitalising average normal business profit earned at the normal rate of return.
Question 3
Under capitalisation method, net assets are equal to:
Total Assets + Liabilities
Total Assets (excluding goodwill, fictitious assets, non-trade investments) - Outside Liabilities
Total Assets + Goodwill
Partners' Capital + Reserves
B
Correct Answer: Total Assets (excluding goodwill, fictitious assets, non-trade investments) - Outside Liabilities
Net assets = All assets (except goodwill, non-trade investments, fictitious assets) at current values minus outside liabilities.
Question 4
Which type of investments are excluded while calculating capital employed?
Trade Investments
Long-term Investments
Short-term Investments
Non-trade Investments
D
Correct Answer: Non-trade Investments
Non-trade investments are excluded while calculating capital employed as they are not used in business operations.
Question 5
Capitalisation of average profit method is one of the methods under which main approach?
Capitalisation Method
Average Profit Method
Super Profit Method
Annuity Method
A
Correct Answer: Capitalisation Method
Capitalisation of average profit is one of the two methods under capitalisation method, the other being capitalisation of super profit.
Question 6
In capitalisation method, what does capitalised value represent?
Book value of assets
Market value of assets
Total value of the business
Value of liabilities
C
Correct Answer: Total value of the business
Capitalised value represents the total value of the business based on its earning capacity at normal rate of return.
Question 7
While calculating net assets, which of the following should be excluded?
Stock and Debtors
Fictitious Assets
Plant and Machinery
Cash and Bank
B
Correct Answer: Fictitious Assets
Fictitious assets (like preliminary expenses, deferred revenue expenditure) are excluded as they have no realisable value.
Question 8
If normal rate of return is 10% and average profit is ₹50,000, what is the capitalised value?
₹50,000
₹5,000
₹10,000
₹5,00,000
D
Correct Answer: ₹5,00,000
Capitalised Value = Average Profit × 100 ÷ Normal Rate = 50,000 × 100 ÷ 10 = ₹5,00,000.
Question 9
What is the main difference between capitalisation of average profit and capitalisation of super profit methods?
First uses average profit, second uses super profit for capitalisation
First excludes normal profit, second includes it
Both methods always give different goodwill values
First is for partnership, second is for companies
A
Correct Answer: First uses average profit, second uses super profit for capitalisation
Capitalisation of average profit capitalises average profit while capitalisation of super profit capitalises super profit only.
Question 10
Under capitalisation method, if capitalised value equals net assets, then goodwill is:
Positive
Negative
Zero
Equal to capital
C
Correct Answer: Zero
Goodwill = Capitalised Value - Net Assets. If both are equal, goodwill = 0.
Question 11
Which component is used to calculate capitalised value in the capitalisation of average profit method for calculation of Goodwill?
Capital employed only
Average profit and normal rate of return
Super profit only
Number of years' purchase
B
Correct Answer: Average profit and normal rate of return
Capitalised value = Average Normal Business Profit × 100 ÷ Normal Rate of Return.
Question 12
If capitalised value is less than net assets, it indicates:
Positive goodwill
Super profit exists
Negative Goodwill
No Goodwill
D
Correct Answer: No Goodwill
When capitalised value < net assets, it means firm earns below normal profit, resulting in no goodwill.
Question 13
Capital employed from liabilities side is calculated as:
Partners' Capital + Reserves - Goodwill - Fictitious Assets - Non-trade Investments
Total Liabilities - Outside Liabilities
Partners' Capital only
Total Assets - Current Liabilities
A
Correct Answer: Partners' Capital + Reserves - Goodwill - Fictitious Assets - Non-trade Investments
From liabilities side: Capital Employed = Partners' Capital + Reserves - Goodwill - Fictitious Assets - Non-trade Investments.
Question 14
In capitalisation method, the normal rate of return represents:
Firm's actual earning rate
Bank interest rate
Expected return in similar business
Government bond rate
C
Correct Answer: Expected return in similar business
Normal rate of return is the rate normally earned by other firms in similar industry or business.
Question 15
Which of the following is not required for capitalisation of average profit method?
Average profit
Number of years' purchase
Normal rate of return
Net assets/Capital employed
B
Correct Answer: Number of years' purchase
Number of years' purchase is used in average profit method and super profit method, not in capitalisation method.
Question 16
For calculating average profits for calculating goodwill, Partners' remuneration (management cost) should be:
Added to profit
Ignored completely
Added to capital
Deducted from profit
D
Correct Answer: Deducted from profit
Partners' remuneration is deducted from profit as it represents value of services and is considered an expense.
Question 17
Value of goodwiill under both capitalisation of average profit and capitalisation of super profit methods is
Different
Same
Goodwill under capitalisation of average profits > Goodwill under capitalisation of super profits
Goodwill under capitalisation of average profits < Goodwill under capitalisation of super profits
B
Correct Answer: Same
Goodwill value is same under both the methods
Question 18
Under capitalisation method, goodwill is zero when:
Profit is high
Capital is low
Net assets exceed capitalised value
Normal rate is zero
C
Correct Answer: Net assets exceed capitalised value
Zero goodwill occurs when net assets > capitalised value, indicating firm earns below normal return.
Question 19
In calculating net assets, trade investments are:
Always excluded
Included as part of capital employed
Treated as fictitious assets
Deducted from liabilities
B
Correct Answer: Included as part of capital employed
Trade investments (made for business furtherance) are part of capital employed, unlike non-trade investments which are excluded.
Question 20
The main advantage of capitalisation method over years' average profits method is:
Easier calculation
No need for normal rate
Ignores capital employed
Based on earning capacity and considers capital invested
D
Correct Answer: Based on earning capacity and considers capital invested
Capitalisation method considers both earning capacity (profit) and capital invested, giving a more rational valuation of goodwill.
Submit Quiz
Reattempt Quiz
