Calculate hidden Goodwill
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Sometimes the value of goodwill is not given at the time of admission of a new partner. In such a situation, goodwill is calculated on the basis of net worth of the business. Hidden goodwill is the excess of desired total capital of the firm over the actual combined capital of all partner.
Following is the accounting treatment of Hidden Goodwill:
Value of Hidden Goodwill =Capitalised value of firm -Net worth
Where,
Capitalised value of firm = Capital of new partner ×Reciprocal of new partner’s share
Net worth = Total capital of new firm (including new partner’s capital) + accumulated profits and reserves ( if any ).
In this question the value of goodwill is not given, so we have to infer the value of goodwill on the basis of C's share in profits and the amount of capital brought by him.
C brings Rs.26000 for 1/4 share in the firm,
hence full capital of the firm will be (26000 x 4/1) = Rs104000
Less the total capitals of A + B + C = Rs.26000 + Rs.22000 + Rs.26000 = Rs74000
Hidden Goodwill (Rs.104000 - Rs.74000) = Rs30000
C's share in goodwill (Rs.30000 x 1/4 = Rs.7500), which he has not brought. But C has to compensate old partners for their sacrifice in the profits of the firm. Since the question is silent about the sacrifice made by A and B, we assume that they have sacrificed in their old ratio i.e. 1 : 1 (since profit sharing ratio between A and B is not given, then as per Partnership Act, 1932, their profit sharing ratio will be equal). Journal entry for goodwill will be:
Following is the accounting treatment of Hidden Goodwill:
Value of Hidden Goodwill =Capitalised value of firm -Net worth
Where,
Capitalised value of firm = Capital of new partner ×Reciprocal of new partner’s share
Net worth = Total capital of new firm (including new partner’s capital) + accumulated profits and reserves ( if any ).
In this question the value of goodwill is not given, so we have to infer the value of goodwill on the basis of C's share in profits and the amount of capital brought by him.
C brings Rs.26000 for 1/4 share in the firm,
hence full capital of the firm will be (26000 x 4/1) = Rs104000
Less the total capitals of A + B + C = Rs.26000 + Rs.22000 + Rs.26000 = Rs74000
Hidden Goodwill (Rs.104000 - Rs.74000) = Rs30000
C's share in goodwill (Rs.30000 x 1/4 = Rs.7500), which he has not brought. But C has to compensate old partners for their sacrifice in the profits of the firm. Since the question is silent about the sacrifice made by A and B, we assume that they have sacrificed in their old ratio i.e. 1 : 1 (since profit sharing ratio between A and B is not given, then as per Partnership Act, 1932, their profit sharing ratio will be equal). Journal entry for goodwill will be:
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