Read the following statements and mark the correct answer.
Assertion: The new partner brings in a premium for goodwill.
Reasoning: The new partner is required to compensate the old partner’s for their loss of share in the super profits of the firm.
Answer & explanation
Correct answer: option 1
The correct answer is option 1- Both Assertion (A) and reasoning (R) are correct and R is the correct explanation of A.
Assertion: The new partner brings in a premium for goodwill. THIS IS TRUE.
Reasoning: The new partner is required to compensate the old partner’s for their loss of share in the super profits of the firm. THIS IS TRUE.
Assertion is true and reason also explain assertion. So, the correct answer is option 1.
In the case of an established firm that may be earning more profits than the normal rate of return on its capital the new partner is required to contribute some additional amount known as premium or goodwill. This is done primarily to compensate the sacrificing partners for loss of their share in the super profits of the firm.