Goodwill

Step 1: Concept of goodwill.
Goodwill reflects the reputation and earning power of a business. It depends on various internal and external factors that enhance customer loyalty and profitability.
Step 2: Analysis of given factors.
- Favourable location: A business at a prime location attracts more customers, increasing goodwill.
- Capital required: Businesses requiring less capital but earning high profits generally show higher goodwill.
- Efficiency of management: Skilled management improves productivity, customer satisfaction, and profit, thereby increasing goodwill.
Step 3: Conclude.
Since all the listed factors directly impact goodwill, the correct answer is “All of these”.
Final Answer:

Step 1: Recall the concept of goodwill valuation.
Goodwill can be valued using different methods such as Average Profit Method, Superprofit Method, and Capitalization Method. The superprofit method is based on excess profit earned compared to normal expected profit.
Step 2: Formula for Superprofit.
Superprofit = Actual Average Profit Normal Profit.
Normal profit is calculated as Capital Employed Normal Rate of Return (NRR).
Step 3: Formula for Goodwill under Superprofit method.

Step 4: Match with options.
Here, “Number of years’ purchase” is referred to as “Purchase year”. Hence, goodwill = Purchase year Superprofit.
Step 5: Conclude.
Therefore, option (B) is the correct one.
Final Answer:

Step 1: Concept of Goodwill.
Goodwill is an intangible asset that represents the reputation and earning capacity of a firm. When a new partner is admitted, he must compensate existing partners for their sacrifice in profit share.
Step 2: Mode of bringing goodwill.
The new partner generally brings goodwill in the form of cash (premium for goodwill). This ensures old partners are compensated immediately.
Step 3: Capital contribution vs goodwill.
Capital contribution is different from goodwill. Capital is invested for ownership in business, whereas goodwill premium is a one-time payment for gaining entry and profit share.
Step 4: Conclude.
Therefore, a new partner brings goodwill in the form of cash.
Final Answer: