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2a: Understanding Goodwill
Goodwill encompasses the advantages a firm gains from factors such as its name, location, reputation, and effective management. It is quantified as the surplus of the purchase consideration over the net assets and is categorized as an intangible asset.
2b: Recording Goodwill under Various Circumstances
- Change in profit sharing ratio
- Dissolution of partnership
- Admission of a new partner
- Death of a partner
- Retirement of a partner
- Purchase of business
2bii: Causes/Reasons for Dissolving a Partnership Firm
- Expiration of the agreed-upon partnership duration
- Bankruptcy of a partner
- Death of any partner
- Voluntary retirement of a partner
- Insolvency or inability to settle debts
- Joint decision to discontinue the business by the partners
- Consistent financial losses in the partnership
- Disagreement between the partners
(3a)
(i) Issued Share Capital:
Issued share capital refers to the total value of shares that a company has issued to its shareholders. This represents the actual amount of capital that shareholders have subscribed to and paid for. The issued share capital may include both equity and preference shares and is a key component of a company's equity.
(ii) Equity Shares: Equity shares, also known as ordinary shares, represent ownership in a company. Equity shareholders have voting rights and are entitled to a share in the company's profits. Unlike preference shares, equity shareholders bear higher risk but also have the potential for higher returns through dividends and capital appreciation.
(iii) Preliminary Expenses: Preliminary expenses are costs incurred in the setup and registration of a company. These expenses include legal fees, registration fees, and other costs associated with the formation of the company. Preliminary expenses are treated as an intangible asset and are amortized over a period.
(3b) Explanation of Accounting Ratios:
(i) Profitability Ratio: Profitability ratios assess a company's ability to generate profits in relation to its revenue, assets, equity, or other financial metrics. One example is the Net Profit Margin, calculated by dividing net profit by total revenue and expressing it as a percentage. A higher net profit margin indicates better profitability.
(ii) Liquidity Ratio: Liquidity ratios measure a company's ability to meet its short-term obligations. An example is the Current Ratio, calculated by dividing current assets by current liabilities. A current ratio higher than 1 indicates that a company has more assets than liabilities, suggesting good short-term financial health.
(iii) Investment Ratio: Investment ratios provide insights into the attractiveness of a company's stock to investors. One example is the Earnings Per Share (EPS), calculated by dividing net profit by the number of outstanding shares. A higher EPS often indicates higher profitability per share.
4A) Three Capital Expenditure Items in Company Accounts:
Purchase of Machinery: When a company buys machinery for its operations, it is considered a capital expenditure. The machinery contributes to the company's ability to generate revenue over an extended period.
Construction of a New Building: The construction of a new building or any significant structural addition falls under capital expenditure. This investment usually provides long-term benefits to the company.
Acquisition of Intellectual Property: If a company acquires patents, copyrights, or other intellectual property rights, the costs associated with obtaining these assets are considered capital expenditures.
B) Basic Assumptions Underlying Depreciation Methods:
(i) Straight Line Method: The basic assumption underlying the straight-line method is that the asset depreciates evenly over its useful life. This method assumes a constant rate of wear and tear, making it straightforward for accounting purposes. It's suitable for assets that experience a consistent decline in value.
(ii) Reducing Balance Method: The reducing balance method assumes that an asset depreciates more in the earlier years of its useful life. This method is based on the idea that the depreciation expense is calculated as a percentage of the remaining book value. It's often used for assets that are expected to have higher maintenance costs in their later years.
C) Elements of Depreciation:
(i) Physical Life: Physical life refers to the actual number of years an asset can function efficiently. It is the period over which the asset is expected to provide economic benefits. Physical life is a critical factor in determining the useful life of an asset for depreciation calculations.
(ii) Residual Value: Residual value, also known as salvage value or scrap value, is the estimated value of an asset at the end of its useful life. It represents the amount a company expects to recover when the asset is no longer productive. Residual value is subtracted from the cost of the asset to determine depreciation.
(iii) Useful Life: Useful life is the expected period during which an asset will be economically beneficial to the company. It is an estimate of how long the company can use the asset to generate revenue. Useful life is a key factor in both straight-line and reducing balance methods of depreciation.
