Answer based on following information
Azad and Babli are partners in a firm sharing profits and losses in the ratio of 2 : 1. Chintan is admitted into the firm with 1/4 share in profits. Chintan will bring in ₹30,000 as his capital and the capitals of Azad and Babli are to be adjusted in the profit sharing ratio. The Balance sheet of Azad and Babli as on December 31, 2016 (before Chintan's admission) was as follows:
|
Liabilities |
Amount (₹) |
Assets |
Amount (₹) |
|
Creditors |
8,000 |
Cash in hand |
2,000 |
|
Bills payable |
4,000 |
Cash in bank |
10,000 |
|
General reserve |
6,000 |
Sundry debtors |
8,000 |
|
Capital accounts: *Azad 50,000 *Babli 32,000 |
82,000 |
Stock
|
10,000
|
|
|
|
Furniture |
5,000 |
|
|
|
Machinery |
25,000 |
|
|
|
Building |
40,000 |
|
|
1,00,000 |
|
1,00,000 |
It was agreed that:
(i) Chintan will bring in ₹12,000 as his share of goodwill premium.
(ii) Buildings were valued at ₹45,000, and Machinery at ₹23,000.
(iii) A provision for doubtful debts is to be created at 6% on debtors.
(iv) The capital accounts of Azad and Babli are to be adjusted by opening current accounts.
Which of the following is not a factor affecting value of goodwill?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Number of partners
Goodwill is the value of a firm’s ability to earn more than normal profits. Anything that raises the earning power of the business raises goodwill; the number of persons who own the business does not change its earning power.
Option (1) Efficiency of management — A factor. A well-managed firm earns higher profits through productivity and cost efficiency.
Option (2) Location of business — A factor. A central location or heavy customer traffic brings more sales and more goodwill.
Option (3) Number of partners — Correct. Profits do not depend on how many partners share them, so it is not listed among the factors.
Option (4) Nature of business — A factor. High value added products or stable demand mean steadier, higher profits.
NCERT (2026-27 edition):
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