Reconstitution of a Partnership Firm – Admission of a Partner — Important Questions

Average Profits × Number of Years

Under the Average Profits Method, goodwill is valued at an agreed number of years' purchase of the average profits of the past few years. It is based on the assumption that a new business will not earn profits initially.

Nature of business, Location of business, Efficiency of management, Market situation, Special advantages

All the given options are factors affecting goodwill value. Nature of business determines stability, location affects customer access, management efficiency impacts profits, market situation affects competition, and special advantages like patents provide unique benefits.

Average Profits - Normal Profits

Super Profits represent the excess of actual profits over normal profits. They are calculated by deducting Normal Profits from Average Profits. Normal Profits = Capital × Normal Rate of Return / 100.

Sacrificing ratio

When a new partner brings goodwill in cash, it is shared by existing partners in their sacrificing ratio because they are being compensated for the share of super profits they are giving up to the new partner.