KESHAV MEMORIAL INSTITUTE OF COMMERCE & SCIENCES
QUESTION BANK OF ADVANCED-ACCOUNTING (B.COM (HONS/GEN/COMP)
SEEMA RANI - FACULTY OF COMMERCE –SEM - III
___________________________________________________________
UNIT – I Partnership Accounts -I
Multiple Choice Questions:
1. What should be the minimum number of persons to form a Partnership?
A.2
B.7
C.10
D.20
2. Liability of partner is:
A. Limited
B. Unlimited
C. Determined by Court
D. Determined by Partnership Act
3. Which accounts are opened when the capitals are fixed?
A Only Capital Accounts
B Only Current Accounts
C. Capital Accounts as well as Current Accounts
D. Either Capital Accounts or Current Accounts
4. Which item is recorded on the credit side of partner’s current accounts :
A. Interest on Fanner’s Capitals
B. Salaries of Partners
C. Share of profits of Partners
D. All of the Above
5. If date of drawings of the partner’s is not given in the question, interest is charged for how
much time
A.1 month
B. 3 months
C. 6 months
D. 12 months
6. What happens when interest on drawings is charged to partner?
A. Credited to partner’s current a/c
B. Not shown in current account
C. Debited to partner’s capital a/c
D. None of the above
7. Account in which Adjustment entries are made
● A. Trading account
● B. Trial balance
● C. Profit & Loss Appropriation account
● D. Ledger account
8. During Admission of a Partner General Reserve is transferred to
A. Partners capital account
B. Partners current account
C. Neither A or B
D. Profit & Loss Appropriation account
9. In the absence of a partnership deed, the allowable rate of interest on partner’s loan
account will be:
A. 6% Simple Interest
B. 6% p.a. Simple Interest
C. 12% Simple Interest
D. 12% Compounded Annual
10. Which one of the following items cannot be recorded in the profit and loss appropriation
account?
A. Interest on capital
B. Interest on drawings
C. Rent paid to partners
D. Partner’s salary
11. In the absence of Partnership Deed:
A. Interest will not be charged on partner’s drawings
B. Interest will be charged @. 5% p.a. on partner’s drawings
C. Interest will be charged @ 6% p.a. on partner’s drawings
D. Interest will be charged @ 12% p.a. on partner’s drawings.
12 Which of the following items are recorded in the P&L Appropriation Account of a
partnership firm?
A. Interest on Capital
B. Salary to Partner
C. Transfer to Reserve
D. All of the above.
13. Which accounts are opened when the capitals are fluctuating?
A. Only Capital Accounts
B. Only Current Accounts
C. Capital Accounts as well as Current Accounts
D. Either Capital Accounts or Current Accounts
14. If date of drawings of the partner’s is not given in the question, interest is charged for
how much time
A. 1 month
B. 3 months
C. 6 months
D. 12 months
15. If a fixed amount is withdrawn by a partner on the first day of every month, interest on
the total amount is charged for …………… months:
A. 6
B. 6 ½
C. 5 ½
D. 12
16. If a fixed amount is withdrawn by a partner on the last day of every month, interest on the
total amount is charged for …………… months:
A. 12
B. 6 ½
C. 5 ½
D. 6
17. which of the following is not pre planned
A. Dissolution
B. Admission
C. Retirement
D. Death
18. During admission, Goodwill raised in full should be debited to
A. Cash account
B. Old partners capital account
C. Goodwill account
D. None
19. During Retirement of a partner, profit on Revaluation is credited to capital accounts of a
partner
A. Equally
B. Profit sharing ratio
C. Capital ratio
D. None
20. Revaluation account is a ___________ account
A. Real
B. Nominal
C. Personal
D. Official
Fill in the blanks:
1. The excess of actual profit over normal profit is called as Super profit.
2. Partnership deed contains the terms & conditions of partnership agreed by all partners.
3. Goodwill is the present value of firms anticipated excess earnings.
4. Revaluation account is a nominal account.
5. Sacrificing ratio = old ratio minus new ratio.
6. Gaining ratio = new ratio minus old ratio.
7. If Goodwill is already appearing in the books ,firstly it should be Written off.
8. Journal entry for increase in the value of the asset - Asset a/c --------------Dr
To Revaluation A/C
9. Sacrificing ratio arises when old partners sacrifices some part of their share.
10. If any partner has taken loan from the Firm then the interest on loan will be charged @
6% in the absence of partnership deed.
11. In case of retirement of a partner goodwill is distributed based on the Gaining ratio
12. In case of Admission of a partner goodwill is distributed based on the Sacrificing ratio
13. In case of death of a partner , profit of deceased partner can be calculated on Time Basis
and Sales Basis
14. Formula to calculate average profit = Total Profit/No of years
15. General reserve will be distributed by crediting partners capital accounts in profit sharing
ratio and will not be shown on Liabilities side of the balance sheet.
16. In death of a partner the balances transferred to Executors account of the deceased
partner
17. Goodwill is an Intangible asset
18. In retirement goodwill is distributed among all the partners where as in admission
goodwill is distributed among Old partners only.
19. A partner who takes active part in day to day activates of the firm is called as Active
partner
20. Partners have a right to participate in Management activities
Short Questions:
1. Define partnership – According to Partnership Act 1932 , partnership is the relation
between persons who have agreed to share the profit of the business carried on by all
or any of them acting for all.
2. What is goodwill – goodwill is the present value of firms anticipated excess earning,
it is an intangible asset.
3. Revaluation Account – it is prepared to ascertain the profit and loss arising out of
revaluation of assets and liabilities
4. Mention the two methods of maintaining capital accounts – fixed capital method &
fluctuating capital method
5. Different methods of valuations of goodwill – Average profit method, super profit
method & capitalization method.
6. Partnership deed – it is a written agreement which contains the terms and condition of
partnership agreed by all partners.
7. Sacrificing ratio – When a new partner is admitted, the old partner forgoes a fraction
of his share in favor of the new partner.
8. Gaining ratio – it is calculated when a partner retires from a firm .
UNIT –II PARTNERSHIP ACCOUNTS II
MULTIPLE CHOICE QUESTIONS
1. Modes by which a firm can be dissolved
A. Mutual agreement
B. By Notice
C. Compulsory Dissolution
D. All of the above
2. At the time of dissolution of the firm , if goodwill appears in the balance sheet it is
transferred to
A. Capital a/c
B. Revaluation a/c
C. Realisation a/c
D. Current a/c
3. General reserve appearing in the balance sheet transferred to
A. Realisation a/c
B. Partners capital a/c in profit sharing ratio
C. Partners capital a/c in capital ratio
D. None of the above
4. On Dissolution goodwill account is transferred to
A. Capital a/c of partners
B. Cash a/c
C. Debit of realisation a/c
D. Credit of realisation a/c
5. On dissolution, if a partner pays firm’s liability which of the following account is debited?
A. Profit and Loss Account
B. Realisation Account
C. Partner’s Capital Account
D. Cash Account
6. On dissolution of a firm, out of the proceeds received from the sale of assets will be paid
first of all
A. Outside Creditors
B. Partner’s additional capital
C. Partner’s Loan to Firm
D. Partner’s Capital
7.________ Means End of the existence of firm, and no business is transacted after It except
the activities related to closing of the firm as the affairs of the firm are to be wound up by
selling firm’s assets and paying its liabilities and discharging the claims of the partners.
A. Dissolution
B. Resolution
C. Reconstruction
D. Dispersion
8. The _________Account is prepared to record the transactions relating to sale and
realisation of assets and settlement of creditors
A. Revaluation Account
B. Realisation
C. Profit and loss account
D. Partners’ capital account
9. In the event of dissolution of partnership firm, the provision for doubtful debts is
transferred to :
A. Realisation Account
B. Partners’ Capital Accounts
C. Sundry Debtors Account
D. None of the above
10. On dissolution of firm, profit/ loss calculated in realisation account is debited/credited to
which account?
A. Cash Account
B. Partners’ Capital Accounts
C. Realisation Account
D. None of these
11. On dissolution of a firm, out of the proceeds received from the sale of assets will be paid
first of all:
A. Partner’s Capitals
B. Partner’s Loan to Firm
C. Partner’s additional capital
D. Outside Creditors
12. In case of dissolution , assets are transferred to realisation account
A. Book value
B. Market value
C. Cost or Market value whichever is lower
D. None
13. Garner Vs Murray is a case related to ______of a partner.
A. Death
B. Dissolution
C. Insolvency
D. Retirement
14. Purchase consideration is paid by the purchasing company in the form of
A. Shares
B. Debentures
C. Both
D. None
15. For closing realisation account the profit & loss is distributed among partners in___ratio
A. Capital ratio
B. Sacrificing ratio
C. Profit sharing ratio
D. None
16. On dissolution, the final balance of capital accounts are transferred to :
A. Realisation Account
B. Cash Account
C. Profit & Loss Account
Loan Accounts of Partners
17. Cash balance shown in the Balance Sheet is shown on dissolution of firm in :
A. Realisation Account
B. Cash Account
C. Capital Account
D. None of the Account
18. In case of dissolution, assets are transferred to Realisation Account:
A. At Book Value
B. At Market Value
C. Cost or Market Value, whichever is lower
D. None of the Above
19. While transferring assets to realisation account ________ is omitted to be transferred:
A. Patents
B. Goodwill
C. Cash
D. Investments
20. After transferring liabilities like creditors and bills payable in the realisation account, in
the absence of any information regarding their payment, such liabilities are treated as
_______.
A. Never paid
B. Fully paid
C. Partly paid
D. None of the above
FILL IN THE BLANKS
1. If all partners mutually decide for the dissolution , it will be dissolution of firm.
2. Unrecorded liabilities, when paid, are shown in Debit side of realization account.
3. Cash balance given in the Balance Sheet is considered in cash account on the
dissolution of the firm .
4. On firm’s dissolution cash account is prepared at the end.
5. Deficiency of Insolvent partner will be shared by solvent partners in their profit –
sharing ratio.
6. If any asset is taken over by partner from firm, his capital A/c will be debited.
7. A Secured Creditor is to be settled Prior to an Unsecured Creditor, to dissolve a
8. Partnership Firm.
9. While dissolving a Partnership Firm, Assets are realized periodically.
10. Realisation Expenses is the First Preference for payment.
11. General reserve is an internal liability.
12. Insolvency of a partner leads to which type of dissolution Compulsory dissolution.
13. Entry for the payment of partners loan : Partners loan a/c
1. To cash / bank a/c
14. Partners are liable to settle the accounts payable account, even from their private
Funds, if they are solvent.
15. The accumulated profits & reserves are transferred to partners capital account .
16. On dissolution Partners loan account is transferred to cash account.
17. Payment of credit balance of Partners’ Capital Accounts at the time of dissolution of a
firm is made to Partners.
18. The amount of purchase consideration can be paid in the form of Shares ,
Debentures , & Cash.
19. Shares & debentures received from the purchasing company should be valued
according to their present worth( market value ).
20. Second preference of payment is payment of outside liabilities.
21. In Garner Vs Murray case solvent partners should bring cash equal to their share of
loss on revaluation .
SHORT ANSWER QUESTION
1. Methods of dissolution of a firm
A. Dissolution by agreement, Compulsory dissolution,
B. Dissolution by court ,
C.Dissolution on the happening of contingencies, Dissolution by notice of partnership
at will.
2. Order of payment on dissolution
Realisation Expenses, outside liabilities, Partners loan , capital accounts.
3.Methods of calculation of purchase consideration
Lump sum method , Net payment method ,Net asset method
4. Realization account
Realization Account is prepared at the time of dissolution of a partnership firm. This
account is prepared to know the profit made or loss incurred at the time of dissolution
of a firm.
5,Dissolution of Partnership It changes the existing relationship between partners but the firm
may continue its business as before.
6. Dissolution of Firm Dissolution of firm means dissolution of partnership among all the
partners in the firm. In this case, business of the firm also comes to an end.
7. Firm’s Debts: It refers to those debts that are borrowed against the name of the firm. All
the partners of the firm are jointly and separately liable for the firm's debt.
8.Private Debts: It refers to those debts that are borrowed personally by the partner. The
concerned partner is personally liable for his private debts.
9.How deficiency of creditors is paid off?
10.Transferring deficiency to the Deficiency Account &. Transferring deficiency to the
Partner's Capital Account
11.State the case of Garner Vs Murray
1. Loss on account of insolvency is a capital loss & it must be shared in capital ratio.
2 If a partner has debit balance in capital a/c , he will not bear the losses of insolvency.
3. If partners capital a/c is fixed, loss of insolvency will be distributed in fixed capital
ratio.
4. If partners capital a/c is fluctuating , partners have to bring cash to cover the loss.
5. Solvent partners bear the loss in capital ratio.
UNIT III -SSUE OF SHARES ,DEBENTURES,UNDERWRITING&BONUS SHARES
MULTIPLE CHOICE QUESTIONS
1. A company is a
A. Artificial person
B. Living person
C. Non living person
D. None
2. Equity share holders are
A. Owners
B. Creditors
C. Customers
D. None
3. When a company repurchase its own share from the market to reduce the number of share
is called
A. Issue of share
B. Forfeited share
C. Buy back of share
D. None
4. The director of a company must be a
A. Agent
B. Shareholder
C. Employee
D. None
5.Which capital to be stated in Memorandum of association of a company
A. Called up capital
B. Subscribed capital
C. Authorized capital
D. Share capital
6.Share capital shown in balance sheet under the heading of
A. Shareholders fund
B. Current assets
C. Fixed assets
D. None
7.Which shareholder have a right to receive the arrears of dividend from future profit
A.Redeemable Preference shares
B. Participating Preference shares
C.Cumulative Preference shares
D.Non-cumulative Preference shares
8.As per SEBI guidelines, Application money should not be less than ___ of the issue price of
each share
A.10%
B.15%
C.25%
D. 45%
9.Amount of call in arrears is shown in balance sheet
A.As a deduction from issued capital
B.As a deduction from Subscribed capital
C.As a addition from Subscribed capital
D.None
10.If discount on reissue of shares is less than the amount forfeited,the surplus is transferred
to
A.Capital reserve
B.General reserve
C.Secret reserve
D.Premium reserve
11. If a shareholder does not pay call money on time a notice of ____ should be given to the
shareholder to pay the amount.
A.10 days
B.14 days
C.15 days
D.20 days
12 Return of partly paid shares by the shareholder to the company is known as
A. Surrender of share
B. Forfeiture of share
C. Buy back of share
D.None
13.When an applicant gets less number of shares than applied , then such situation is called
A.Capital reserve
B.Premium
C.Discount
D.Pro-rata
4. Loss on the issue of debenture is
A. Current asset.
B. Intangible asset.
C. Current liability
D. Miscellaneous expense.
5. Generally debentures are
A. Secured
B. Unsecured
C. Partly Secured
D. None of these
6. When all debentures are redeemed, balance in the Debenture Redemption Fund
Account is transferred to:
A. Capital Reserve
B. General Reserve
C. Profit & Loss Appropriation A/c
D. None of these
7. According to SEBI guidelines, a Company will have to create debenture redemption
reserve equivalent to the amount of the following percentage of debenture issued:
A. 50%
B. 25%
C. 70%
D. 100%
8. Debentures can be redeemed out of:
A. Profit
B. Capital
C. Provision
D. All of the above
9. Debentures cannot be redeemed at:
A. Par
B. Premium
C. Discount
D. More than 10% premium
10. Profit on redemption of debentures in transferred to which account ?
A. General Reserve Account
B. Sinking Fund Account
C. Capital Reserve Account
D. Profit & Loss Account
11. Debenture holders are the
A. Customers of the Company
B. Owners of the Company
C. Creditors of the Company
D. None of these
FILL IN THE BLANKS
1. In the Balance Sheet of a Company, Debentures are shown under the head Long-
term Loans
2. A person who undertake to take up the whole or a portion of the offered shares or
debentures as may not be subscribed for by the public is called Underwriter
3. A definite commitment by the underwriter to take up a specified number of shares or
debentures of a company irrespective of the number shares or debentures subscribed
for by the public is known as Firm underwriting
4. Applications bearing the stamp of the respective underwriter are called as Marked
applications
5. Bonus shares are shares issued by a company free of cost to its existing shareholders
6. Bonus issue can be made on Fully paid-up shares.
7. A company cannot issue fully paid-up bonus shares to its members out of
Revaluation Reserve
8. If company makes bonus issue at 2:3 then it means for every three shares two bonus
shares will be allotted.
9. Underwriting is a contract of Guarantee.
10. .Under Employee stock option plan , a employee can purchase shares at a pre
determined price.
11. Voluntary return of shares by a shareholder to the company is called Surrender of
shares.
12. Forfeiture of shares results in the reduction of Paid-up capital.
13. Balance of forfeited shares account after the reissue of forfeited shares is transferred
to Capital reserve account.
14. Loss on Issue of Debenture Account is shown On Assets side of Balance Sheet.
15. Premium on Redemption of Debentures A/c is Liability.
16. Sinking fund investment is An Asset.
17. Secured debenture are known as Mortgage debentures.
18. The rate of commission payable on the issue of debentures is 2.5%.
19. Premium on redemption of debentures is provided at the time of Redemption of
debentures.
20. Debentures indicate Long-term borrowings of the company.
SHORT QUESTIONS
1. Call in arrears
When a company issues its share in the market, public purchases its shares and
they become its shareholders, they may not pay the amount called on a particular
date, that amount is known as Calls in Arrears.
2. Forfeiture of shares
A forfeited share is an equity share investment which is cancelled by the issuing
company. A share is forfeited when the shareholder fails to pay the subscription
money called upon by the issuing company.
3. Oversubscription
It is referred to as the situation where a company receives more applications from
share buyers than the number of shares made available for public.
4. Pro rata allotment
Pro-rata allotment refers to the allotment of shares in proportion of the shares
applied for it adjusts the excess money received at the time of application firstly,
towards the allotment and then towards calls.
5. Bonus shares
Bonus shares are the additional shares that a company gives to its existing
shareholders issued without any additional cost.
6. Calls in advance
Calls in advance is the prepayment of uncalled amount on the shares by one or
more shareholders.
7. Bearer debentures
Bearer debentures are the debentures which can be transferred by way of delivery
and the company does not keep any record of the debenture holders.
8. Firm underwriting
When an underwriter agrees to buy a definite number of shares or
debentures in addition to the shares and debentures he has to take under
the underwriting agreement, this is called firm underwriting.
9. Marked & unmarked application of debentures
The applications bearing the stamp of the respective underwriters are called
“Marked Applications” while the applications received directly by the company
which do not bear any stamp of the underwriters are called “Unmarked
Applications”.
10. Underwriting commission
Underwriting commission is a payment, which is given by the company, to
underwriters for their services of underwriting. Companies can give maximum 5%
commission to underwriters for selling its shares.
UNIT –IV COMPANY FINAL ACCOUNTS & PROFIT PRIOR TO INCORPORATION
MULTIPLE CHOICE QUESTIONS
1.For computation of pre-incorporation profit travelling expenses are allocated in……........
A. Pre-incorporation period
B. Post-incorporation period
C. Sales ratio
D. Time ratio
2. Profit up to date of incorporation is ……........
A. capital Reserve
B. capital profit
C. security premium
D. statutory reserve
3. For computation of pre-incorporation profit carriage on purchases is……........
A. Allocated in sales ratio
B. Allocated in purchase ratio
C. Debited to pre-incorporation period
D. Debited to post-incorporation period
4. For computation of pre-incorporation profit Bad Debts are allocated in……........
A. Pre-incorporation period
B. post-incorporation period
C. sales ratio
D. time ratio
5. The excess of net assets over consideration is called……........
A. Security premium
B. Goodwill
C. Capital Reserve
D. None of the above
6. The loss during the pre-incorporation period is called……........
A. Security premium
B. Goodwill
C. Capital Reserve
D. Share Capital
7. The interest paid to venders should be allocated in ratio of……........
A. time
B. sales
C. Adjusted time ratio
D. none
8. Bad debts written off realised is shown under
A. Pre incorporation income
B. Post incorporation income
C. Profit & Loss account
D. None
9.For computation of profit prior to incorporation , salary to directors is considered as
A. Pre incorporation expenditure
B. Post incorporation expenditure
C. Sales ratio
D. Time ratio
10. Pre-incorporation profit is available for
A. Payment of dividend
B. Payment of interest on debentures
C. Payment for fixed assets
D. None
11 For computation of pre-incorporation profit Depreciation is allocated in……........
A. Pre-incorporation period
B. post-incorporation period
C. sales ratio
D. Time ratio
12. The company’s final accounts are prepared in _____________ form.
A. Vertical
B. Horizontal
C. Both A & B
D. None of the above
13. The amount of debtors due for more than _______ months is to be shown separately.
A. Five
B. Two
C. Six
D. Nine
14. The balance in Share Forfeiture Account after reissue of forfeited shares is to be shown as
_________.
A. General reserve
B. Securities premium
C. Capital reserve
D. Provision for Taxation
15.When shares issued at premium which of the following account is credited?
A. Share forfeited account
B. Share allotment account
C. Share First call account
D. Share premium account
16 . Shares received from the new company is recorded at
A. Market value
B. Face value
C. Average price
D. None
17. Net Assets minus Capital Reserve is
A. Purchase consideration
B. Goodwill
C. Total assets
D. None
FILL IN THE BLANKS
1. Financial statements should be presented according to schedule III of companies act.
2. Share application money pending allotment is shown under Equity & Liabilities.
3. Share application money received is shown under current liabilities.
4. Amount of profit which is available for distribution to shareholders is called as
Divisible profits.
5. Companies distribute dividend in the form of shares of other companies held by them
as investments is called scrip dividend.
6. Total percentage of dividend distribution tax is 17% approximately.
7. Advance payment of tax should be shown on the asset side of balance sheet.
8. Profit prior to incorporation is a capital profit.
9. Profit earned after incorporation is a revenue profit.
10. Depreciation is allocated based on time ratio.
11. Capital profit must be transferred to capital reserve account.
12. Under profit prior to incorporation, Gross profit is allocated based on sales ratio.
13. Final dividend is recommended by directors & declared by shareholders in annual
general meeting.
14. Holders of cumulative preference shares can claim the unpaid dividend in any year
when there are sufficient profits.
15. Loss prior to incorporation is a capital loss & debited to Goodwill account.
16. Profit prior to incorporation of a company is transferred to Capital reserve.
17. Profit on sale of fixed asset is a capital profit.
18. If any dividend not claimed for a period of 7 years then it should be transferred to
general revenue account of the central government by the company.
SHORT QUESTION ANSWERS
1. Share capital
It refers to the total amount of money which is obtained from subscribers on
the shares of a company.
2. Operating cycle
It is the time duration for acquiring the raw materials till the final product are
made to realize cash or cash equivalent.
3. Sales ratio
It is calculated based on the sales during pre & post incorporation period is
called as sales ratio.
4.Weighted time ratio
It is calculated based on the time period & no of workers available in both pre
& post incorporation period is called as Weighted time ratio.
5.Purpose of Profit prior to incorporation
For writing of Goodwill, For paying partly paid shares, For writing of
Preliminary expenses, For issuing Bonus shares.
6. Sources of declaring dividend
a] Out of current profits
b] Out of past reserves
c] Out of money provided by government
7. Scrip dividend
When companies distribute dividend in the form of shares of other companies
held by them as investments is called scrip dividend.
8. Dividend distribution tax
Dividend Distribution Tax (DDT) is a tax levied on dividends distributed by
companies out of their profits among their shareholders. The Dividend
Distribution Tax is taxable at source and is deducted at the time of the
distribution.
UNIT –V VALUATION OF GOODWILL & SHARES
MULTIPLE CHOICE QUESTIONS
1. Goodwill is an
A)Tangible asset
B) Intangible asset
C) Fictitious asset
D) Fixed asset
2. Which of the following methods are used for the valuation of goodwill?
A) Super profit method
B) Weighted profit method
C) Average profit method
D) All of the above
3. Which of the following factors is not affecting the goodwill of a company?
A) Location of a company’s customers
B) Nature of business
C) Efficiency of a company’s management
D) None of the above
4. The formula for calculating goodwill under the simple average profit method is ________.
A) Goodwill = Super profit * Annuity factor
B) Goodwill = Super profit * No. of years purchase
C) Goodwill = Average profit * No. of years purchase
D) Goodwill = Weighted average profit * No. of years purchase
5. ________ is the main reason why the intrinsic value of a share is lesser than its market
value.
A) Market is undervaluing the share
B) Market is overvaluing the share
C) Share has a low level of risk
D) Share offers a high dividend payout ratio
6. The formula for valuation of equity shares is __________ multiplied by the price-earnings
ratio.
A) Interest per share
B) Bonus per share
C) Earnings per share
D) None of the above
7. The shares appear at _________ in the balance sheet of a company.
A) Paid-up value
B) Market price
C) Adjusted market value
D) None of the above
8. Which of the following is not essential to calculate the yield value per share?
A) Super profit
B) Paid-up value
C) Normal return rate
D) Expected return rate
9. Under the capitalization method, the formula for calculating the goodwill is
A) Super profits multiplied by the rate of return
B) Average profits multiplied by the rate of return
C) Super profits divided by the rate of return
D) Average profits divided by the rate of return
10. Goodwill is paid for procuring
A) Present benefit
B) Past benefit
C) Future benefit
D) None of the above
11. The term “super profit” means_______
A) Extra profit earned
B) Profit earned in abnormal circumstance
C) Excess of average profit over normal profit
D) Average profit earned by similar companies
12. The value of a share under the net asset approach is determined by ______.
A) Accessible net assets to equity owners
B) Net assets accessible to holders of debentures
C) The value of preference shareholders’ net assets
D) None of the preceding
13. A share’s fair market value is equal to ________.
A) Only the intrinsic worth
B) Only the yield value
C) Average of the intrinsic and yield values.
D) None of the above
14. Yield value is subject to ……………………….
A) Gross profits
B) Operating profits
C) Net profit
D) Losses
15. Under net asset method, value of a share depends on ___________.
A) Net assets available to equity shareholders
B) Net assets available to debentures holders
C) Net assets available to preference shareholders
D) None of the above
16. While deciding net asset value, fictitious assets ___________.
A) Should be considered
B) Should not be considered
C) Added to total assets
D) None of the above
17. F.M.P. for yield valuation is ___________.
A) Future profit
B) Profit that would be available to equity shareholders
C) Past profit
D) None of the above
18.EPS depends on net profit available to………………. Shareholders.
A) Equity
B) Preference
C) Debenture
D) Both A and B
19. F.M.P. stands for …………………
A) Firm maintainable profits
B) Future maintainable profits
C) False maintainable profits
D) Foreign maintainable profits.
FILL IN THE BLANKS
1. Intrinsic Value Method is also called as Asset Backing method.
2. Yield value is based on the assumption that Going concern.
3. Intrinsic value depends on Net assets.
4. Proposed preference dividend is deducted while calculating net assets available
to equity shareholders.
5. When controlling shares to be sold then, Rate of earning is the appropriate base
for valuation of shares.
6. In the balance sheet shares appears at Paid-up value.
7. If super profits are negative, then goodwill will be nil.
8. Normal profit can be calculated with the help of Normal rate of return & capital
employed.
9. Capital Employed = Fixed Assets + Current Assets – Outside Liabilities.
10. Goodwill = Super Profit × Number of Years’ of Purchase, in capitalization
method.
11. Normal rate of return = Normal profit / Normal capital employed *100
12. Two types of goodwill are Purchased goodwill & Non purchased goodwill.
13. The concept of assuming liquidation of uncalled capital is known as Notional
call.
14. Fair value method = Intrinsic value + Yield value/2
15. Fair value method is also known as dual method.
16. Average profit = total profit / no of years.
17. Intrinsic value of share is 140, yield value of share is 130 , then Fair value of share
is 135 Rs.
18. Goodwill is shown in company’s balance sheet under the head Non current
assets .
19. In net asset basis method value of share depends on the amount available to
Equity shareholders.
20. For calculating value of a share by Intrinsic value method , it is essential to know
Net assets.
SHORT QUESTION & ANSWERS
1.Capital Employed:
Capital Employed is the total funds deployed for running the business with the
intent to earn profits and is usually calculated by adding working capital to
fixed assets.
2.Super Profit
Super profits refer to the profits in excess of normal profits that a business
expects to earn.
3.Methods of valuing shares
a] Net asset basis
b]Yield basis
c] Fair value method
4.Methods of valuing Goodwill
a] Average profit method
b] Super profit method
c] Capitalization method
d] Annuity method
5. Types of goodwill
Purchased goodwill & Non purchased or Inherent goodwill.
6. Inherent goodwill
A. Inherent goodwill is the value of business in excess of the fair value of its
separable net assets. It is internally generated goodwill and it arises over a period of
time due to good reputation of a business .
7. Normal rate of return
A. Normal Rate of Returns means rate of profit on capital employed which is
normally earned by others in a similar type of business. It will be given in the form
of percentages.
8. Weighted average profit method of goodwill
In this method, last year’s profit is calculated by a specific number of weights
& It
is divided by the total number of weights for determining the profit.
9. Annuity Method:
A. Under this method, goodwill is calculated by taking average super profit as the
value of an annuity over a certain number of years. The present value of this annuity
is computed by discounting at the given rate of interest (normal rate of return). This
discounted present value of the annuity is the value of goodwill. The value of annuity
for Rupee 1 can be known by reference to the annuity tables.
10.Objects for valuation of goodwill
A. a] Profitability
B. b] Normal rate of return
C. c] Capital employed.
Prepared by
SEEMA RANI
ASST. PROFESSOR
