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JAMB Principles of Accounts 2000 Question 37

Question 37

Purchase of Business

Whan a purchased business is revalued, the effect is that

  1. A.a decrease in the value of asset has no effect on value of goodwill
  2. B.an increase in the value of asset is treated as an increase in the value of goodwill
  3. C.a decrease in the value of asset is treated as a decrease in the value of goodwill
  4. D.an increase in the value of asset is treated as a decrease in the value of goodwill.
Show the answer and explanation

Answer: D (an increase in the value of asset is treated as a decrease in the value of goodwill.)

Explanation

Goodwill = price − net assets. If the assets are revalued upward, net assets rise and goodwill falls.