Question

How to finding hidden goodwill

Answer 1

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 partners'. Capital of L and M are ` 2,00,000 and ` 1,50,000 respectively.

Answer 2

ANSWER :

Sometimes the value of goodwill of a firm doesnot appears in the books of accounts and hence it is not given in the question. In such a situation, goodwill is inferred on the basis of the net worth of the firm. Such goodwill is known as Hidden goodwill or Inferred goodwill.

❒ Calculation of Hidden Goodwill :-

• ⊚ The amount of Hidden goodwill is calculated by ascertaining the difference between the capitalized value of the firm and capital invested (net worth) by all partners. For this purpose, the net worth of the firm is deducted from the capitalized value of the firm.

❍ Steps :

The following steps to be followed while calculating the Hidden Goodwill of a firm :-

• ✎ Step 1 : Ascertainment of Total capital (Capitalized Value of the firm) of the new firm on the basis of the share of the incoming partner as well as his capital. It is calculated by multiplying the capital invested by the new partner with the reciprocal of his share.

• ✎ Step 2 : Ascertainment of Total Capital of the firm (Net Worth) including the capital of new partner. This is calculated by adding the capitals of all the partners of the new firm.

• ✎ Step 3 : Ascertainment of the difference between Capitalized Value of the firm and Net Worth of the firm. When Net Worth of the firm is deducted from Capitalized Value of the firm; the amount so obtained is known as the amount of Goodwill.

❍ Formula :

The amount of Hidden Goodwill can be calculated by using the following formula :-

• ✠ Hidden  Goodwill = Capitalized Value of Firm – Net worth (Capital) of Firm

Where,

• ➛ Capitalized Value of Firm = Capital Invested by the New Partner × Reciprocal of Share of the New Partner

And,

• ➛ Net worth (Capital) of Firm = Total Capital of Invested by the Partners (Including New Partner) + All Reserve