1Q)PARTNERSHIP & TYPES FEATURES??

ANS:-A partnership is a form of business organization where two

or more individuals, known as partners, agree to share the profits
and losses of a business.
Types of Partnerships
1. General Partnership: A general partnership is a partnership
where all partners have equal rights and responsibilities.
2. Limited Partnership: A limited partnership is a partnership
where one or more partners have limited liability.
3. Limited Liability Partnership (LLP): A limited liability
partnership is a partnership where all partners have limited
liability.
4. Joint Venture: A joint venture is a partnership between two or
more individuals or businesses for a specific project or purpose.
5. Partnership at Will: A partnership at will is a partnership that
can be dissolved at any time by any partner.
Features of Partnership
1. Voluntary Association: A partnership is a voluntary association
of two or more individuals.
2. Shared Ownership: Partners share ownership of the business.
3. Shared Profits and Losses: Partners share the profits and losses
of the business.
4. Unlimited Liability: Partners have unlimited liability, meaning
they are personally responsible for the debts of the business.
5. Mutual Agency: Partners are agents of each other, meaning
they can bind each other to contracts.
6. Flexibility: Partnerships are flexible, meaning partners can
make decisions quickly without needing to consult with a board
of directors.
7. Easy to Establish: Partnerships are easy to establish, requiring
only a partnership agreement.
8. Tax Benefits: Partnerships have tax benefits, as profits are only
taxed at the individual level.
2Q)PARTNERSHIPS DEEDS ? LEGAL PROVISION, ABSENCE OF
PARTNERSHIP DEEDS??
ANS:-A partnership deed, also known as a partnership agreement, is a
written document that outlines the terms and conditions of a
partnership. It is a legally binding contract between the partners that
defines their roles, responsibilities, and obligations.
Legal Provisions of Partnership Deed
1. Name and Business: The partnership deed should specify the name
and business of the partnership.
2. Partners' Names and Addresses: The partnership deed should specify
the names and addresses of all partners.
3. Capital Contribution: The partnership deed should specify the capital
contribution of each partner.
4. Profit-Sharing Ratio: The partnership deed should specify the profit-
sharing ratio among the partners.
5. Roles and Responsibilities: The partnership deed should specify the
roles and responsibilities of each partner.
6. Decision-Making Process: The partnership deed should specify the
decision-making process, including the voting rights of each partner.
7. Dispute Resolution: The partnership deed should specify the dispute
resolution process, including the procedure for resolving conflicts
between partners.
8. Dissolution: The partnership deed should specify the procedure for
dissolving the partnership.
Absence of Partnership Deed
In the absence of a partnership deed, the partnership will be governed
by the Partnership Act, 1932. The Act provides for the following:
1. Equal Sharing of Profits and Losses: In the absence of a partnership
deed, the profits and losses will be shared equally among the partners.
2. Equal Management: In the absence of a partnership deed, all partners
will have equal management rights.
3. No Interest on Capital: In the absence of a partnership deed, no
partner will be entitled to interest on their capital contribution.
4. No Remuneration: In the absence of a partnership deed, no partner
will be entitled to remuneration for their services.
It is essential to have a partnership deed to avoid disputes and ensure
that the partnership is governed by clear rules and procedures.
3Q)WHAT IS SOLVENCY AND INSOLVENCY OF A PARTNERS? EXPLAIN
THE ROLE UNDER GARNER VS MURRAY JUDGEMENT??
Solvency and Insolvency of a Partner
Solvency and insolvency are two important concepts in partnership
law that determine a partner's ability to pay their debts.
Solvency
Solvency refers to a partner's ability to pay their debts in full. A
solvent partner has sufficient assets to cover their liabilities.
Insolvency
Insolvency, on the other hand, refers to a partner's inability to pay
their debts. An insolvent partner does not have sufficient assets to
cover their liabilities.
Role of Solvency and Insolvency under Garner vs Murray Judgment
The Garner vs Murray judgment (1904) is a landmark case in
partnership law that deals with the issue of solvency and insolvency of
partners.
Key Points of the Judgment
1. Joint Liability: The judgment established that partners are jointly
liable for the debts of the partnership.2. Insolvency of One Partner: If
one partner becomes insolvent, the other partners must contribute to
the insolvent partner's share of the partnership debts.
3. Solvency of Other Partners: The solvent partners must contribute to
the insolvent partner's share of the partnership debts in proportion to
their share of profits.
Implications of the Judgment
1. Protection of Creditors: The judgment protects the interests of
creditors by ensuring that solvent partners contribute to the insolvent
partner's share of the partnership debts.
2. Risk for Solvent Partners: The judgment increases the risk for
solvent partners, as they may be required to contribute to the
insolvent partner's share of the partnership debts.
In conclusion, the Garner vs Murray judgment highlights the
importance of solvency and insolvency in partnership law. It
establishes the principle of joint liability among partners and requires
solvent partners to contribute to the insolvent partner's share of the
partnership debts.
4Q)DIFFERENCE REALIZATION AND REVALUATION ACCOUNT ??
ANS:-Realization Account:
A realization account is a temporary account used to record the sale or
disposal of assets, such as inventory, property, or investments. It is used
to determine the profit or loss on the sale of these assets.
Revaluation Account:
A revaluation account is a temporary account used to record changes in
the value of assets, such as property, investments, or inventory. It is used
to adjust the carrying value of these assets to their current market value.
Key differences:
1. Purpose: The purpose of a realization account is to record the sale or
disposal of assets, while the purpose of a revaluation account is to adjust
the carrying value of assets to their current market value.
2. Type of transaction: A realization account records a sale or disposal
transaction, while a revaluation account records a change in value due to
market fluctuations or other factors.
3. Effect on financial statements: A realization account affects the income
statement, while a revaluation account affects the balance sheet.
4. Accounting treatment: A realization account is closed by transferring
the profit or loss to the income statement, while a revaluation account is
closed by transferring the adjustment to the asset account.
Example:
Suppose a company sells an investment for $100,000, which was
originally purchased for $80,000. The realization account would record
the sale as follows:
Realization Account:
Debit: Investment (cost) $80,000
Credit: Cash $100,000
Credit: Profit on sale $20,000
On the other hand, suppose a company revalues its property to reflect a
increase in market value from $500,000 to $600,000. The revaluation
account would record the change as follows:
Revaluation Account:
Debit: Property (increase in value) $100,000
Credit: Revaluation reserve $100,000
5Q)DISSOLUTION OF A FIRM STEPS INVOLVED ON DISSOLUTION OF
PARTNERS FIRM??
ANS:-Dissolution of a firm refers to the process of winding up the business
and bringing an end to the partnership. This can be done voluntarily by the
partners or compulsorily by a court order.
Steps Involved in Dissolution of a Partnership Firm:
1. Dissolution Agreement: The partners must enter into a dissolution
agreement, which outlines the terms and conditions of the dissolution.
2. Notice of Dissolution: The partners must give public notice of the
dissolution, usually through a newspaper advertisement.
3. Settlement of Accounts: The partners must settle their accounts,
including the payment of debts and the distribution of assets.
4. Realization of Assets: The partners must realize the assets of the firm,
including the sale of property, inventory, and other assets.
5. Payment of Debts: The partners must pay off the debts of the firm,
including loans, taxes, and other liabilities.
6. Distribution of Surplus: After paying off the debts, the partners must
distribute the surplus assets among themselves, usually in accordance with
their profit-sharing ratio.
7. Dissolution of Partnership Deed: The partnership deed must be
dissolved, and the partners must execute a deed of dissolution.
8. Filing with Registrar: The dissolution deed must be filed with the
Registrar of Firms, along with the necessary documents and fees.
Types of Dissolution:
1. Dissolution by Agreement: Dissolution by mutual agreement among the
partners.
2. Dissolution by Notice: Dissolution by serving a notice by one partner to
the other partners.
3. Dissolution by Court Order: Dissolution by a court order, usually due to a
dispute among the partners or insolvency.
4. Dissolution on Death or Insolvency: Dissolution due to the death or
insolvency of one or more partners.
Consequences of Dissolution:
1. Termination of Partnership: Dissolution terminates the partnership and
brings an end to the business.
2. Winding Up of Business: Dissolution requires the winding up of the
business, including the realization of assets and payment of debts.
3. Distribution of Assets: Dissolution requires the distribution of assets
among the partners, usually in accordance with their profit-sharing ratio.
6Q)LIABILITIES OF ACT OF AFTER DISSOLUTION , SETTLEMENT OF A
AFTER PASS??
ANS:-Liabilities of Acts Done After Dissolution:
After a partnership is dissolved, the partners may still be liable for
certain acts done after dissolution. These liabilities include:
1. Acts Done in the Ordinary Course of Business: Partners may still be
liable for acts done in the ordinary course of business, such as paying
debts or fulfilling contracts.
2. Acts Done with the Knowledge and Consent of All Partners: Partners
may still be liable for acts done with the knowledge and consent of all
partners, such as selling assets or settling disputes.
3. Acts Done to Protect Partnership Assets: Partners may still be liable
for acts done to protect partnership assets, such as paying taxes or
insurance premiums.
Settlement of Accounts After Dissolution:
After a partnership is dissolved, the partners must settle their accounts
and distribute the assets and liabilities among themselves. The
settlement of accounts involves:
1. Preparation of Final Accounts: The partners must prepare final
accounts, including the balance sheet and profit and loss account.
2. Determination of Profit or Loss: The partners must determine the
profit or loss of the partnership and distribute it among themselves.
3. Payment of Debts: The partners must pay off the debts of the
partnership, including loans, taxes, and other liabilities.
4. Distribution of Assets: The partners must distribute the assets of the
partnership among themselves, usually in accordance with their profit-
sharing ratio.
Passing of Property After Dissolution:
After a partnership is dissolved, the property of the partnership must be
distributed among the partners. The passing of property involves:
1. Transfer of Assets: The assets of the partnership, such as property,
equipment, and inventory, must be transferred to the partners.
2. Distribution of Assets: The assets must be distributed among the
partners, usually in accordance with their profit-sharing ratio.
3. Payment of Liabilities: The partners must pay off the liabilities of the
partnership, including loans, taxes, and other debts.
7Q)EXPLAIN THE PROCEDURE OF REALISATION OF ASSETS &
LIABILITIES??
Realization of Assets
The procedure for realization of assets is as follows:
1. Identification of Assets: Identify all the assets of the partnership,
including tangible assets such as property, equipment, and inventory,
and intangible assets such as goodwill and patents.
2. Valuation of Assets: Value each asset at its current market value or fair value.
3. Conversion of Assets into Cash: Convert each asset into cash, either by
selling it or by disposing of it in some other way.
4. Payment of Expenses: Pay any expenses incurred in realizing the
assets, such as commission, brokerage, and other costs.
5. Credit to Realization Account: Credit the proceeds of the sale of each
asset to the realization account.
Realization of Liabilities
The procedure for realization of liabilities is as follows:
1. Identification of Liabilities: Identify all the liabilities of the
partnership, including debts, loans, and other obligations.
2. Payment of Liabilities: Pay off each liability in full, using the proceeds
of the sale of assets.
3. Debit to Realization Account: Debit the amount paid to each liability to
the realization account.
4. Payment of Expenses: Pay any expenses incurred in realizing the
liabilities, such as interest, penalties, and other costs.
Realization Account
The realization account is a temporary account used to record the
proceeds of the sale of assets and the payment of liabilities. The account
is debited with the expenses incurred in realizing the assets and
liabilities, and credited with the proceeds of the sale of assets.
Finalization of Accounts
After the realization of assets and liabilities, the accounts are finalized by:
1. Preparation of Final Accounts: Preparing the final accounts, including
the balance sheet and profit and loss account.
2. Determination of Profit or Loss: Determining the profit or loss of the
partnership and distributing it among the partners.
3. Distribution of Assets: Distributing the assets of the partnership among
the partners, usually in accordance with their profit-sharing ratio.
8Q)EXPLAIN THE PROCEDURE OF REALISATION OF ASSETS &
LIABILITIES??
Realization of Assets
1. Identification of Assets: Identify all the assets of the partnership,
including tangible assets such as property, equipment, and inventory,
and intangible assets such as goodwill and patents.
2. Valuation of Assets: Value each asset at its current market value or fair
value.
3. Conversion of Assets into Cash: Convert each asset into cash, either by
selling it or by disposing of it in some other way.
4. Payment of Expenses: Pay any expenses incurred in realizing the
assets, such as commission, brokerage, and other costs.
5. Credit to Realization Account: Credit the proceeds of the sale of each
asset to the realization account.
Realization of Liabilities
1. Identification of Liabilities: Identify all the liabilities of the
partnership, including debts, loans, and other obligations.
2. Payment of Liabilities: Pay off each liability in full, using the proceeds
of the sale of assets.
3. Debit to Realization Account: Debit the amount paid to each liability to
the realization account.
4. Payment of Expenses: Pay any expenses incurred in realizing the
liabilities, such as interest, penalties, and other costs.
Realization Account
1. Temporary Account: The realization account is a temporary account
used to record the proceeds of the sale of assets and the payment of
liabilities.
2. Debit and Credit: The account is debited with the expenses incurred in
realizing the assets and liabilities, and credited with the proceeds of the
sale of assets.
Finalization of Accounts
1. Preparation of Final Accounts: Prepare the final accounts, including
the balance sheet and profit and loss account.
2. Determination of Profit or Loss: Determine the profit or loss of the
partnership and distribute it among the partners.
3. Distribution of Assets: Distribute the assets of the partnership among
the partners, usually in accordance with their profit-sharing ratio.
9Q)WHAT IS THE DIFFERENCES BETWEEN EQUILTY SHARES AND (104) PREFERENCE
SHARES AND ALSO EXPLAIN UNDERWRITING??
ANS:-Differences between Equity Shares and Preference Shares
1. Ownership: Equity shareholders have ownership rights in the company, whereas
preference shareholders do not have ownership rights.
2. Dividend: Equity shareholders are entitled to receive dividends, but the amount is not
fixed. Preference shareholders are entitled to receive a fixed dividend.
3. Voting Rights: Equity shareholders have voting rights, whereas preference
shareholders usually do not have voting rights.
4. Redemption: Preference shares are redeemable, whereas equity shares are not
redeemable.
5. Return on Investment: Equity shareholders are entitled to receive a return on their
investment in the form of dividends and capital appreciation. Preference shareholders
are entitled to receive a fixed return on their investment in the form of dividends.
Section 104 of the Companies Act, 2013
Section 104 of the Companies Act, 2013 deals with the issue of preference shares.
According to this section:
1. Issue of Preference Shares: A company can issue preference shares with the approval
of the shareholders.
2. Terms and Conditions: The terms and conditions of the preference shares, including
the dividend rate, redemption price, and voting rights, must be specified in the articles
of association.
3. Redemption: Preference shares must be redeemed within a period of 20 years from
the date of issue.
Underwriting
Underwriting is a process in which an underwriter guarantees to purchase a certain
number of shares or securities at a specified price. The underwriter acts as a middleman
between the issuer and the investor.
Types of Underwriting:
1. Firm Underwriting: The underwriter guarantees to purchase the entire issue of
securities at a specified price.
2. Best Efforts Underwriting: The underwriter agrees to use its best efforts to sell the
securities, but does not guarantee to purchase the entire issue.
3. Standby Underwriting: The underwriter agrees to purchase any unsold securities at
the end of the offering period.
Role of Underwriter:
1. Guarantee: The underwriter guarantees to purchase the securities at a specified price.
2. Marketing: The underwriter markets the securities to investors.
3. Risk Management: The underwriter manages the risk of the offering by purchasing
any unsold securities.
In conclusion, equity shares and preference shares are two different types of shares with
different characteristics. Underwriting is a process in which an underwriter guarantees
to purchase a certain number of shares or securities at a specified price.
10Q)DIFFERENCE BETWEEN SHARES AND DEBENTURES?? (108)
(105&106)??
ANS:-Differences between Shares and Debentures
1. Ownership: Shares represent ownership in a company, whereas
debentures represent a loan to the company.
2. Return on Investment: Shareholders are entitled to receive dividends,
which are a portion of the company's profits. Debenture holders are
entitled to receive interest on their investment.
3. Voting Rights: Shareholders have voting rights, whereas debenture
holders do not have voting rights.
4. Redemption: Debentures are redeemable, whereas shares are not
redeemable.
5. Risk: Shares are considered a higher-risk investment, whereas
debentures are considered a lower-risk investment.
Section 108 of the Companies Act, 2013
Section 108 of the Companies Act, 2013 deals with the issue of
debentures. According to this section:
1. Issue of Debentures: A company can issue debentures with the
approval of the shareholders.
2. Terms and Conditions: The terms and conditions of the debentures,
including the interest rate, redemption price, and maturity date, must be
specified in the debenture trust deed.
Section 105 and 106 of the Companies Act, 2013
Sections 105 and 106 of the Companies Act, 2013 deal with the issue of
shares. According to these sections:
1. Issue of Shares: A company can issue shares with the approval of the
shareholders.
2. Terms and Conditions: The terms and conditions of the shares,
including the face value, premium, and dividend rate, must be specified
in the articles of association.
Key differences between Sections 105, 106, and 108
1. Type of Instrument: Section 105 and 106 deal with the issue of shares,
whereas Section 108 deals with the issue of debentures.
2. Ownership: Shares represent ownership in a company, whereas
debentures represent a loan to the company.
3. Return on Investment: Shareholders are entitled to receive dividends,
whereas debenture holders are entitled to receive interest on their
investment.
11Q)EXPLAIN THE GUIDELINES ISSUED BY SEBI FOR ISSUE OF BONUS SHARES
(115)??
ANS:-Guidelines Issued by SEBI for Issue of Bonus Shares
The Securities and Exchange Board of India (SEBI) has issued guidelines for
the issue of bonus shares by listed companies. These guidelines are contained
in the SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015.
Section 115 of the Companies Act, 2013
Section 115 of the Companies Act, 2013 deals with the issue of bonus shares.
According to this section:
1. Issue of Bonus Shares: A company can issue bonus shares to its existing
shareholders by capitalizing its reserves or profits.
2. Authorization: The issue of bonus shares must be authorized by the articles
of association of the company.
3. Board Resolution: The board of directors of the company must pass a
resolution to issue bonus shares.
SEBI Guidelines for Issue of Bonus Shares
1. Pre-issue Obligations: The company must comply with the pre-issue
obligations specified in the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015.
2. Board Resolution: The board of directors of the company must pass a
resolution to issue bonus shares.
3. Shareholders' Approval: The company must obtain the approval of its
shareholders by way of a special resolution.
4. Disclosure Requirements: The company must disclose the following
information to the stock exchanges and the public:
- The ratio of bonus shares to be issued
- The record date for determining the eligibility of shareholders
- The date of allotment of bonus shares
1. Compliance with Listing Agreement: The company must comply with the
listing agreement and the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015.
Consequences of Non-Compliance
Non-compliance with the SEBI guidelines for issue of bonus shares may result
in:
1. Penalties: The company may be liable to pay penalties under the SEBI Act,
1992.
2. Suspension of Trading: The stock exchanges may suspend trading in the
securities of the company.
3. Delisting: The company may be delisted from the stock exchanges.
12Q)DEFINE COMPANY AND EXPLAIN THE COMPANIES ACT 2013??
ANS:-A company is a legal entity that is separate and distinct from its owners.
It is a voluntary association of individuals, having a separate existence,
perpetual succession, and a common seal. Companies can be formed for
various purposes, including profit-making, charitable, or social welfare.
The Companies Act, 2013
The Companies Act, 2013 is an Act of the Indian Parliament that regulates the
formation, management, and operation of companies in India. It replaced the
Companies Act, 1956 and came into effect on April 1, 2014.
Key Features of the Companies Act, 2013
1. Types of Companies: The Act recognizes several types of companies,
including private companies, public companies, one-person companies, and
non-profit companies.
2. Incorporation: The Act provides for the incorporation of companies,
including the process of registration and the issuance of a certificate of
incorporation.
3. Share Capital: The Act regulates the share capital of companies, including
the issuance of shares, share transfers, and share buybacks.
4. Management and Administration: The Act provides for the management and
administration of companies, including the roles and responsibilities of
directors, managing directors, and company secretaries.
5. Meetings and Resolutions: The Act regulates the conduct of meetings and
the passing of resolutions by companies.
6. Accounts and Audit: The Act requires companies to maintain proper
accounts and to have their accounts audited annually.
7. Inspection and Investigation: The Act provides for the inspection and
investigation of companies, including the powers of inspectors and
investigators.
8. Winding Up: The Act regulates the winding up of companies, including the
process of liquidation and the distribution of assets.
Objectives of the Companies Act, 2013
1. To Simplify the Law: The Act aims to simplify the law relating to companies
and to make it more accessible to stakeholders.
2. To Improve Corporate Governance: The Act aims to improve corporate
governance by introducing measures such as independent directors, audit
committees, and whistle-blower protection.
3. To Enhance Transparency and Accountability: The Act aims to enhance
transparency and accountability by requiring companies to disclose more
information and to comply with stricter accounting and auditing standards.
4. To Protect the Interests of Stakeholders: The Act aims to protect the
interests of stakeholders, including shareholders, creditors, and employees.
13Q)EXPLAIN GENERAL INSTRUCTIONS TO ACCOUNT FOR PREPARE OF
BALANACE SHEET UNDER NEW SCHEDULE OF COMPANY??
ANS:-General Instructions for Preparation of Balance Sheet
The Ministry of Corporate Affairs (MCA) has notified the Companies
(Accounts) Rules, 2014, which prescribe the format and contents of the
balance sheet. The new schedule VI to the Companies Act, 2013 provides the
general instructions for preparation of balance sheet.
Instructions for Preparation of Balance Sheet
1. Classification of Assets and Liabilities: Assets and liabilities should be
classified into current and non-current categories.
2. Disclosure Requirements: The balance sheet should disclose all material
information, including contingent liabilities, commitments, and significant
accounting policies.
3. Valuation of Assets: Assets should be valued at their cost or net realizable
value, whichever is lower.
4. Depreciation and Amortization: Depreciation and amortization should be
provided on all depreciable assets.
5. Provisions and Reserves: Provisions and reserves should be created for all
known liabilities and losses.
6. Disclosure of Contingent Liabilities: Contingent liabilities should be
disclosed in the balance sheet.
7. Disclosure of Commitments: Commitments should be disclosed in the
balance sheet.
New Schedule VI to the Companies Act, 2013
The new schedule VI to the Companies Act, 2013 provides the format and
contents of the balance sheet. The schedule requires the following disclosures:
1. Capital: Share capital, reserves, and surplus.
2. Non-Current Assets: Fixed assets, investments, and deferred tax assets.
3. Current Assets: Current investments, inventories, trade receivables, cash
and bank balances.
4. Non-Current Liabilities: Long-term borrowings, trade payables, and
provisions.
5. Current Liabilities: Short-term borrowings, trade payables, and provisions.
Key Changes in the New Schedule VI
1. Classification of Assets and Liabilities: Assets and liabilities are classified
into current and non-current categories.
2. Disclosure Requirements: The new schedule requires more disclosures,
including contingent liabilities, commitments, and significant accounting
policies.
3. Valuation of Assets: Assets are valued at their cost or net realizable value,
whichever is lower.
14Q)HOW THE PROFIT PRIOR TO INCORPORATION IS A SUBSTANCE
AND WHAT PURPOSE CAN BE UTILIZED??
ANS:-Profit Prior to Incorporation
Profit prior to incorporation refers to the profit earned by a business
before it is incorporated as a company. This profit is also known as
"pre-incorporation profit" or "pre-operative profit."
Substance of Profit Prior to Incorporation
The profit prior to incorporation is a substance because it represents
the earnings of the business before it was formally established as a
company. This profit is usually earned by the promoters or founders
of the company, who may have been operating the business as a sole
proprietorship or partnership before incorporating it as a company.
Purpose of Profit Prior to Incorporation
The profit prior to incorporation can be utilized for various purposes,
including:
1. Setting off Preliminary Expenses: The profit prior to incorporation
can be used to set off preliminary expenses incurred by the company,
such as registration fees, legal fees, and other expenses.
2. Writing off Losses: The profit prior to incorporation can be used to
write off losses incurred by the company during its pre-incorporation
period.
3. Distribution as Dividend: The profit prior to incorporation can be
distributed as dividend to the shareholders of the company.
4. Transfer to Reserve: The profit prior to incorporation can be
transferred to the company's reserve fund, which can be used to meet
future contingencies or expenses.
Accounting Treatment
The profit prior to incorporation is usually accounted for in the
company's books of account by debiting the "pre-incorporation profit"
account and crediting the "share capital" or "reserve" account.
Tax Implications
The profit prior to incorporation may be subject to tax, depending on
the tax laws applicable to the company. The company may need to pay
tax on the profit prior to incorporation, and the tax liability may need
to be accounted for in the company's books of account.
15Q)DEFINE GOODWILL EXPLAIN ITS FEATURES NEED AND FACTORS
AFFECTED THE VALUATION OF GOODWILL??
ANS:-Goodwill is an intangible asset that represents the excess value of a
business over its net asset value. It is the reputation, brand image,
customer loyalty, and other intangible factors that contribute to a
company's success and profitability.
Features of Goodwill
1. Intangible Asset: Goodwill is an intangible asset, meaning it cannot be
seen or touched.
2. Non-Physical: Goodwill is a non-physical asset, unlike tangible assets
like property, plant, and equipment.
3. Value Depends on Business: The value of goodwill depends on the
performance and profitability of the business.
4. Not Separable: Goodwill is not separable from the business and cannot
be sold separately.
Need for Goodwill
1. Acquisitions: Goodwill is often recognized when one company
acquires another, and the purchase price exceeds the net asset value of
the acquired company.
2. Financial Reporting: Goodwill is recognized as an asset on the balance
sheet to reflect the excess value of the business.
3. Taxation: Goodwill can be amortized for tax purposes, providing tax
benefits to the acquiring company.
Factors Affecting the Valuation of Goodwill
1. Earnings and Profitability: The earnings and profitability of the
business are key factors in determining the value of goodwill.
2. Market Position and Competition: The market position and
competitive landscape of the business can impact the value of goodwill.
3. Brand Recognition and Reputation: The strength of the brand and
reputation of the business can contribute to the value of goodwill.
4. Customer Loyalty and Relationships: The loyalty and relationships
with customers can impact the value of goodwill.
5. Growth Prospects: The growth prospects of the business can impact
the value of goodwill.
6. Industry and Market Trends: Industry and market trends can impact
the value of goodwill.
7. Regulatory Environment: The regulatory environment in which the
business operates can impact the value of goodwill.
16Q)HOW SUPER PROFIT METHOD IS DIFFERENT FROPM OTHER
METHODS OF VALUATIONS GOODWILL??
ANS:-Super Profit Method
The super profit method is a method of valuing goodwill that is based on
the excess profits earned by a business over and above its normal profits.
The super profit method is also known as the "excess earnings method".
How the Super Profit Method Works
1. Calculate Normal Profits: Calculate the normal profits of the business,
which is the average profit earned by similar businesses in the industry.
2. Calculate Super Profits: Calculate the super profits of the business, which
is the excess profit earned by the business over and above its normal
profits.
3. Multiply Super Profits by Number of Years: Multiply the super profits by
the number of years for which the goodwill is to be valued.
4. Calculate Goodwill Value: Calculate the value of goodwill by capitalizing
the super profits.
How the Super Profit Method is Different from Other Methods
1. Excess Earnings Approach: The super profit method uses an excess
earnings approach, which is different from other methods that use a
capitalization of earnings approach.
2. Focus on Excess Profits: The super profit method focuses on the excess
profits earned by the business, whereas other methods focus on the
average profits earned by the business.
3. Use of Normal Profits: The super profit method uses normal profits as a
benchmark to calculate super profits, whereas other methods do not use
normal profits as a benchmark.
Advantages of the Super Profit Method
1. More Accurate Valuation: The super profit method provides a more
accurate valuation of goodwill, as it takes into account the excess profits
earned by the business.
2. Focus on Excess Profits: The super profit method focuses on the excess
profits earned by the business, which is a key driver of goodwill value.
Disadvantages of the Super Profit Method
1. Complexity: The super profit method is more complex than other
methods, as it requires the calculation of normal profits and super profits.
2. Subjectivity: The super profit method involves a degree of subjectivity, as
the calculation of normal profits and super profits requires judgment and
estimation