Partnership

Admission

Easy

Excess value of net assets over purchase consideration at the time of purchase of business is credited to

General reserve

Capital reserve

Vendors' account

Debenture Redemption reserve

✅ Correct Option: 2

When a business is purchased, the Purchase Consideration (amount paid to vendor) is compared with the Net Assets acquired (Total Assets - Total Liabilities).

Three scenarios can arise:

Case 1: Purchase Consideration > Net Assets

→ Excess is debited as Goodwill (Asset)

Case 2: Purchase Consideration = Net Assets

→ No difference arises

Case 3: Purchase Consideration < Net Assets

→ Excess of Net Assets is a gain/profit for the purchasing business

In the given question, Net Assets exceed Purchase Consideration. This represents a capital profit because:

It arises from a capital transaction (purchase of business)
It is not earned through normal business operations
It is a one-time gain at the time of acquisition

As per accounting principles, capital profits must be credited to Capital Reserve, not General Reserve. Capital Reserve represents profits of a capital nature that are not available for distribution as dividends and can only be utilized for specific purposes like writing off capital losses or issuing bonus shares.

The journal entry would be:

$\text{Net Assets Value} - \text{Purchase Consideration} = \text{Capital Reserve}$

Capital Reserve Account ... Dr

This gain cannot be credited to:

General Reserve (meant for revenue profits)
Vendor's Account (liability to seller)
Debenture Redemption Reserve (specific reserve for debenture redemption)

Therefore, the excess value of net assets over purchase consideration is credited to Capital Reserve.

2026: 19 May Shift 1

A and B are partners. The net assets of the firm, including fictitious assets of Rs. 5,000, are Rs. 105,000. The total external liabilities of the firm are Rs. 20,000. The normal rate of return is 10% and the average profit of the firm is Rs. 12,000. The value of goodwill as per capitalization of super profit method will be :

2026: 31 May Shift 1

Shubham and Gill are partners in a firm sharing profits in the ratio of 5:3. They admit Hardik as a new partner for 1/7 share in the profit. The new profit sharing ratio will be 4:2:1. What will be the sacrificing ratio of Shubham and Gill?

2023: 11 June Shift 3

Match List - I with List - II.

List - I	List - II
(A) Increase in Furniture Value	(I) Credit side of Partner's Capital A/c
(B) Depreciation on Machinery	(II) Debit side of Partner's Capital A/c
(C) General Reserve	(III) Credit side of Revaluation A/c
(D) Goodwill appearing in Books	(IV) Debit side of Revaluation A/c

Choose the correct answer from the options given below :

2026: 11 May Shift 2

Arrange the following steps being used in calculating goodwill of the firm by Capitalisation of Super Profits.

A. Calculate normal profits on capital employed and average profit for past years.

B. Multiply the super profits by the required rate of return multiplier, i.e. Goodwill = Super Profits × 100/Normal Rate of Return

C. Calculate super profits by deducting normal profits from average profits.

D. Calculate capital of the firm, which is equal to total assets (excluding goodwill and fictitious assets) minus outside liabilities

Choose the correct answer from the options given below:

2025: 22 May Shift 1

The ratio in which the old partners agree to give their share of profit in favor of the incoming partner is called:

2026: 12 May Shift 1

A business has earned average profits of Rs. 5,30,000 during the last few years and the normal rate of return in a similar business is 10%. Ascertain the value of goodwill by capitalisation of average profits method, given that the value of net assets of the business is Rs. 30,00,000.

Excess value of net assets over purchase consideration at the time of purchase of business is credited to

Solution

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