Question

How to calculate hidden Goodwill?

Answer 1

Step I:    Calculate the total capital of the firm on the basis of the capital brought by the new partner. It is calculated as follow:

Total Capital of firm = Capital of new partner × 1/New partner share

Step II:   Find out the combined capital of all the partners. It is calculated as follow:

Combined Capital of all Partners = Old Partners Capital + New Partner's Capital

Step III: Determine the Hidden Goodwill as under:

Hidden Goodwill = Total Capital of firm - Combined Capital of all Partners

Adjustment of Capital:

It is studied in two parts:

(a) If the new partner has to bring in the proportionate capital(b) If the capitals of old partners are adjusted on the basis of new partner's capital.

(a) If the new partner has to bring the proportionate share:

Following steps are involved:

Step 1:    Calculate the adjusted old capitals of old partners (after all adjustments have been made)

Step 2:    Calculate the total capital of new firm as follow:

               Total capital = Combined adjusted old capitals       Reciprocal of proportion

               Of old partners × of share of old partners

Step 3:    Calculate the proportionate Capital of new partner as follow:

               New Partner Capital = Total capital × Proportion of share of new partner

(b) If the capitals of old partners are adjusted on the basis of new partner's capital:

Steps followed in the adjustment of capitals are as follows:

Step 1:    Calculate Total Capital of New Firm as under

               Total capital = New Partner's capital × 1/New Partner's share

Step 2:    Calculate the new capitals of old partners by dividing the total capital in the new profit sharing ratio.

Step 3:    Calculate the adjusted old capitals of old partners by preparing the Capital A/cs

Step 4:    Calculate the surplus/deficiency of the old partners capital A/c by comparing the new capital with the adjusted old capitals.

Step 5:    Adjust the surplus by paying of or by transferring it to the credit of the current A/c and to adjust the deficiency by asking the concerned partner to bring the required amount or by transferring the amount due to the debit of the partner's current A/c.

Journal Entry for the Step 5:

1.          In case the adjusted old capitals are less than the new capital:

             Cash A/c or Concerned Partner's Current a/c           Dr

                        To Concerned Partner's Capital A/c

2.          In case the adjusted old capitals are more than the new capital: