Meaning 

Hidden Goodwill also called inferred goodwill is there when the value of Goodwill is not specifically given in the question but is implied from the capital brought by new partner for his share in the firm.

Calculation of Hidden Goodwill on Admission of Partner

The value of goodwill is calculated on the basis of the capital of the firm by taking the following steps:

1. Calculate the total capital of the firm on the basis of the capital brought by the new partner.

Total capital of the new firm = New Partner's capital × reciprocal of new partner’s share

2.  Find out the combined capital of all the partners including new partner.

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

3. Hidden Goodwill = Total Capital of the new firm (step 1) - Combined Capital of all Partners (step 2)

Following journal entry should be passed for hidden goodwill:

New Partner's Current A/c (share in hidden goodwill) Dr.

To Sacrificing Partner's Capital A/c (in sacrifice ratio)

Practice Questions 

Hidden Goodwill on Admission of Partner

Question 1:

P and Q are partners in a firm with capital of ₹2,60,000 and ₹4,00,000. R was admitted for 1/3rd share in profit and brings 6,80,000 as capital, calculate the amount of goodwill.

Answer: ₹7,00,000

Question 2:

P and Q were partners in a firm sharing profits and losses equally. Their capitals were ₹3,00,000 and ₹4,00,000 respectively. R was admitted as a new partner for 1/4th share in the profits of the firm for which he brought ₹3,00,000 as his capital. Calculate the amount of goodwill.

Answer: ₹2,00,000

Question 3:

P and Q were partners in a firm sharing profits and losses in the rate 2:1. Their fixed capitals were ₹4,00,000 and ₹5,00,000 respectively. On 1st April, 2024 R was admitted as a new partner for 1/4th share in the profits, R brought ₹4,00,000 for his capital which was to he kept fixed like the capitals of P and Q. R acquired his share of profit from P only. Pass necessary Journal entries for the treatment of Goodwill on R's admission.

Answer with hints:

(a) Hidden Goodwill : ₹3,00,000

(b) New Profit Sharing Ratio: 5:4:3

(c) Sacrifice Ratio: Only P sacrifices.

(d) R’s Current A/c                     Dr. ₹75,000

To P’s Current A/c ₹75,000

Question 4:

A and B were partners in a firm sharing profits in the ratio of 2:3. Their capitals were ₹2,60,000 and ₹2,00,000 respectively. They admitted C on 1st April, 2024 as a new partner for 1/5th share in the future profits, C brought ₹2,40,000 as his capital. Record Journal entries for Goodwill on C's admission.

Answer with hints:

(a) Hidden Goodwill: ₹5,00,000

(b) Sacrifice Ratio of A and B: 2:3

(c) C’s Capital/Current A/c            Dr. ₹100,000

To A’s Capital A/c ₹40,000

To B’s Capital A/c ₹60,000

Question 5:

A and B are partners in a firm. They admit C as a partner with 1/4th share in the profits of the firm. Chetan brings ₹3,00,000 as his share of capital. Value of the total assets of the firm is ₹7,00,000 and outside liabilities are valued at ₹1,25,000 on that date. Give necessary entry to record goodwill at the time of C's admission.

Answer with hints:

(a) Hidden Goodwill: ₹3,25,000

(b) Sacrifice Ratio: 1:1

(c) C’s Capital/Current A/c     Dr. ₹81,250

To A’s Capital A/c ₹40,625

To B’s Capital A/c ₹40,625

Hidden Goodwill on Admission of Partner

Question 6:

A and B are partners with capitals of ₹1,00,000 each. They admit C as a partner for 1/4th share in the profits of the firm. C brings in ₹1,20,000 as his share of capital. Profit & Loss Account showed a credit balance of ₹60,000 as on date of admission of C. Record Journal entries on C’s admission.

Answer with hints:

(a) Hidden Goodwill: ₹1,00,000

(b) Sacrifice Ratio: 1:1

(c) Journal Entries:

(c1) Bank A/c   Dr. ₹1,20,000

To C’s Capital A/c   ₹1,20,000

(c2) Profit & Loss A/c     Dr. ₹60,000

To A’s Capital A/c ₹30,000

To B’s Capital A/c ₹30,000

(c3) C’s Capital/Current A/c     Dr. ₹25,000

To A’s Capital A/c ₹12,500

To B’s Capital A/c ₹12,500

Question 7:

A and B are partners in a firm. They admit C as a new partner with 1/5th share in the profits of the firm. C brings ₹5,00,000 as his share of capital. The assets of the firm consisted of cash ₹25,000, Bank Balance ₹4,20,000, Debtors ₹2,18,000 and Fixed Assets ₹8,37,000 whereas outside liabilities were ₹ 5,00,000 on that date. Give necessary Journal entry to record goodwill at the time of C's admission.

Answer with hints:

(a) Hidden Goodwill: ₹10,00,000

(b) Sacrifice Ratio: 1:1

(c) C’s Capital/Current A/c     Dr. ₹2,00,000

To A’s Capital A/c ₹1,00,000

To B’s Capital A/c ₹1,00,000

Question 8:

A and B are partners sharing profits in the ratio of 3:2. Their capitals on 1st April 2023 were ₹90,000 and ₹150,000 respectively. They admitted C into partnership on that date for 1/5th share in the future profits, which he acquires equally from A and B. C brings in ₹80,000 as his share of Capital. On the date of C's admission, Profit & Loss A/c (Credit) Balance ₹22,000, General Reserve ₹13,000, Advertisement Suspense ₹5,000. Show entries for goodwill.

Answer with hints:

(a) Hidden Goodwill: ₹50,000

(b) Sacrifice Ratio: 3:2

(c) C’s Capital/Current A/c     Dr. ₹10,000

To A’s Capital A/c ₹6,000

To B’s Capital A/c ₹4,000

Treatment of Goodwill on Admission of Partner

Revaluation of Assets and Liabilities

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These MCQs are based on Admission of a new partner to the partnership. Try these questions after thoroughly preparing the chapter. Check your time taken and accuracy, the ultimate requirements for success in examination.

1. Which of the following is not true with respect to Admission of a partner?

a) A new partner can be admitted if it is agreed in the partnership deed.

b) If all the partners agree, a new partner can be admitted.

c) A new partner has to bring relatively higher capital as compared to the existing partners

d) A new partner gets right in the assets of the firm

2. As per ---------, only purchased goodwill can be shown in the Balance Sheet.

a) Accounting Standard - 37

b) Accounting Standard - 26

c) Section 37 of Indian Partnership Act

d) Accounting Standard -3

3. Pindi and Shindi are partners with capitals ₹1,80,000 and ₹1,40,000 respectively, sharing profits in the ratio of 2:1. They admit Cindy and agreed to give her 1/5th share in future profits if she brings ₹80,000. Goodwill of the firm is:

a) ₹43,750

b) ₹45,000

c) ₹47,250

d) Nil

4. Shruti and Mamta are partners in a firm sharing profits and losses in the ratio of 2: 1. They admitted Rajni as a partner for 2/7 share for which ₹8,000 and ₹4,000 are credited as a premium for goodwill to the old partners respectively. New profit-sharing ratio of Shruti, Mamta and Rajni will be:

a) 3:2:2

b) 4:2:1

c) 10:5:6

d) 4:1:2

5. Ankita and Bina are partners sharing profits and losses in the ratio of 3 and 2. Chitra is admitted for ¼ and for which ₹30,000 and ₹10,000 are credited as a premium for goodwill to Ankita and Bina respectively. The new profit-sharing ratio of Ankita, Bina, Chitra will be:

a) 3:2:1

b) 12:8:5

c) 9:6:5

d) 33:27:20

6. Mona and Shona are partners in a firm with capital of ₹18,000 and ₹20,000. Teena brings ₹10,000 for his share of goodwill and she is required to bring proportionate capital for 1/3rdshare in profits. The capital contribution of Teena will be:

a) ₹24,000.

b) ₹19,000.

c) ₹12,667.

d) ₹14,000.

7. Amrit and Mankirat were partners sharing profits and losses equally. They admitted Davinder as a new partner for 1/3 share. Davinder is to bring 20% of the combined capital of all the partners. Capitals of Amrit and Mankirat after all the adjustments related to Revaluation Gain, Goodwill treatment and Accumulated profits/losses were ₹7,40,000 and ₹4,60,000 respectively. Determine the Capital amount to be brought in by Davinder.

a) ₹4,00,000

b) ₹6,00,000

c) ₹2,40,000

d) ₹3,00,000

8. Meena and Teena were partners in a firm sharing profits in the ratio of 3: 2. Neena was admitted with the one sixth share in the profits of the firm. At the time of admission, Workmen’s Compensation Reserve appeared in the Balance Sheet of the firm at ₹ 32,000. The claim on account of workmen’s compensation was determined at ₹ 40,000. Excess of claim over the reserve will be:

a) Credited to Revaluation Account.

b) Debited to Revaluation Account.

c) Credited to old partner’s Capital Account.

d) Debited to old partner’s Capital Account.

9. Peter and Kaef are partners in a firm sharing profits in the ratio of 3:2. Capitals of Peter and Kaef after adjustments are ₹80,000 and ₹60,000 respectively. They admit Ralaph as a partner on his capital contribution of ₹35,000. New profit-sharing ratio of partners is to be 5:3:2. Capital Accounts of the old partners are to be proportionate of their profit-sharing ratio adjusted on the basis of Ralaph's Capital. Surplus capital to be paid to Kaef will be:

a) ₹5,000

b) ₹6,000

c) ₹7,500

d) ₹8,000

10. Ajit and Baljit were in partnership sharing profits and losses in the ratio of 3: 2. They admitted Charanjit for 1/5th share in profits. Capitals of Ajit and Baljit after adjustments are ₹50,000 and ₹40,000 respectively. Charanjit is to bring 25% of the total capital of the new firm. The capital contribution of Charanjit will be:

a) ₹15,000

b) ₹25,000

c) ₹20,000

d) ₹30,000

Class 12 Accountancy MCQs Admission of Partner

11. As per Accounting Standard-26, goodwill is to be recorded in the books of accounts only when money or money’s worth has been paid for it. At the time of admission, Anantbir, a new partner was unable to bring in his share of goodwill in cash, so:

a) Current A/c will be credited

b) His Current A/c will be debited

c) Capital A/c will be debited

d) Capital A/c will be credited

12. At the time of admission of a new partner in the firm, the new partner compensates the old partners for their loss of share in the super-profits of the firm for which he brings in an additional amount which is known as:

a) Premium for Goodwill

b) Capital

c) Super Profit

d) Average Profit

13. On the admission of a new partner:

a) Old partnership is dissolved

b) Both old partnership and firm are dissolved

c) Old firm is dissolved

d) None of the above

14. Harish and Nishi share profits & losses equally. Their capitals were ₹1,20,000 and ₹ 80,000 respectively. There was also a balance of ₹ 60,000 in General reserve and revaluation gain amounted to ₹ 15,000. They admit friend Ashu with 1/5 share. Ashu brings ₹90,000 as capital. Calculate the amount of goodwill of the firm.

a) ₹1,00,000

b) ₹ 85,000

c) ₹20,000

d) None of the above

15. Yamini and Zinni are partners sharing profits in the ratio of 2:1. They admit Kinni into partnership for 25% share of profit. Kinni acquired the share from old partners in the ratio of 3:2. The new profit-sharing ratio will be:

a) 14:31:15

b) 3:2:1

c) 31:14:15

d) 2:3:1

16. Anchal and Bindi are partners sharing profit and losses in ratio of 5:3. Cindy is admitted for 1/4th share. On the date of reconstitution, the debtors stood at ₹ 40,000, bill receivable stood at ₹ 10,000 and the provision for doubtful debts appeared at ₹ 4000. A bill receivable, of ₹ 10,000 which was discounted from the bank, earlier has been reported to be dishonored. The firm has sold, the debtor so arising to a debt collection agency at a loss of 40%. If bad debts now have arisen for ₹ 6,000 and firm decides to maintain provisions at same rate as before then amount of Provision to be debited to Revaluation Account would be:

a) ₹ 4,400

b) ₹ 4,000

c) ₹ 3,400

d) None of the above

17. Arman and Sharman share Profit & Loss equally. Their capitals were ₹1,20,000 and ₹ 80,000 respectively. There was also a balance of ₹ 50,000 in Contingency reserve and revaluation gain amounted to ₹ 25,000. They admit friend Tarun with 1/5 share. Tarun brings ₹90,000 as capital. Calculate the amount of goodwill brought by Tarun.

a) ₹85,000

b) ₹17,000

c) ₹20,000

d) None of the above

18. Anne and Bani are partners sharing profits in the ratio of 2:3. Their balance sheet shows machinery at ₹2,00,000; stock ₹80,000, and debtors at ₹1,60,000. Tinni is admitted and the new profit sharing ratio is 6:9:5. Machinery is revalued at ₹1,40,000 and a provision is made for doubtful debts @5%. Anne’s share in loss on revaluation amount to ₹20,000. Revalued value of stock will be:

a) ₹62,000

b) ₹1,00,000

c) ₹60,000

d) ₹98,000

19. At the time of admission of a partner, Employees Provident Fund is:

a) Distributed to partners in the old profit-sharing ratio

b) Distributed to partners in the new profit-sharing ratio

c) Adjusted through gaining ratio

d) None of the above

20. The firm of X, Y and Z with profit sharing ratio of 6:3:1, had the balance in General Reserve Account amounting ₹ 1,80,000. S joined as a new partner and the new profit-sharing ratio was decided to be 3:3:3:1. Partners decide to keep the General Reserve unchanged in the books of accounts. The effect will be:

a) X will be credited by ₹ 54,000

b) X will be debited by ₹ 54,000

c) X will be credited by ₹ 36.000

d) X will be credited by ₹ 18,000

Class 12 Accountancy MCQs Admission of Partner - Answers

1. c) A new partner has to bring relatively higher capital as compared to the existing partners
2. b) Accounting Standard - 26
3. d) Nil
4. c) 10:5:6
5. d) 33:27:20
6. a) ₹24,000.
7. d) ₹3,00,000
8. b) Debited to Revaluation Account.
9. c) ₹7,500
10. d) ₹30,000
11. b) His Current A/c will be debited
12. a) Premium for Goodwill
13. a) Old partnership is dissolved
14. b) ₹ 85,000
15. c) 31:14:15
16. c) ₹ 3,400
17. b) ₹17,000
18. d) ₹98,000
19. d) None of the above
20. a) X will be credited by ₹ 54,000

Adjustments on Admission of New Partner

Class 12 Accountancy MCQs Reconstitution of Partnership Firm

Class 12 Accountancy MCQs Admission of Partner

Learning Games and Activities in Accountancy – Class 12

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When a new partner joins a partnership firm, he is said to be admitted into partnership.

He is required to bring the following:

1. Capital for his share in the firm.

2. Goodwill for his share in the future profits.

New partner will enjoy the following rights after his admission:

1. His share in the future profits of the firm.

2. His share in the assets of the firm.

3. All other rights as a partner like right to be consulted, right to participate in decision making etc.

Adjustments on Admission of the new partner from accounting point of view:

Calculation of new profit sharing ratio.

When a new partner is admitted, his ratio should be clear to all partners. The old partners are also affected by his admission, their New Shares should also be clear to all of them.

Accounting treatment of goodwill.

New partner will be entitled to profits in the firm after his joining wherever the efforts were made by the old partners. The position regarding Goodwill should also be handled well.

Revaluation of assets and liabilities.

The values of assets and/or liabilities of the firm would have changed till the date of admission. The Profit or Loss on revaluation of assets and liabilities should also be shared properly.

Treatment of reserves, accumulated profits/ losses.

There is possibility of undistributed profits and/or accumulated losses appearing in the Balance Sheet of partnership firm, on the date of admission of new partner. He was not there so; he has no claim or share in all these. Profit will not be shared by Old partners with him, and He would not like to share the Losses before his joining the firm.

Adjustment of partners' capitals.

All partners can decide on the new Capital of the firm or new capital share can be prescribed for new partner. Anyway, Capital Accounts of the partners need to be adjusted with settlement through payment or withdrawal of cash or through their current accounts.

Read all the concerned topics to understand these issues well.

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Different cases of Treatment of Goodwill 

Old partners must be compensated by the new partner for sacrificing their share of profit, by way of goodwill.

1.       When goodwill is paid privately.

2.       When goodwill is brought in cash or in kind.

3.       When goodwill is not brought in cash or in kind (Sometimes, raised and then written off).

4.       When there is part payment of goodwill.

5.       When the goodwill is hidden.

1. When goodwill is paid privately.

No journal entry is passed in this case.

2. When goodwill is brought in cash or in kind.

Following journal entries are passed in this case:

(a) For amount of goodwill brought in cash/kind/asset:

Cash/Bank/Other Assets A/c                                 Dr.         (separately)

To Premium for Goodwill A/c

(b) Distribution of premium among sacrificing partners in their sacrificing ratio:

Premium for Goodwill A/c                                    Dr.

To Old Partner's Capital A/c (in sacrificing ratio)

(c)If goodwill is withdrawn by old partners:

Old Partner's Capital A/c                                       Dr.

To Cash/Bank A/c

3. When goodwill is not brought in cash or in kind.

New Partner's Current A/c                             Dr

To Old Partner's Capital A/c

(New partner's share shared in sacrificing ratio)

4. When there is part payment of goodwill.

(a) For the amount of goodwill brought in cash:

Cash/Bank A/c                                                     Dr.

To Premium for Goodwill A/c

(b) For sharing goodwill among old partners in sacrificing ratio:

Premium for Goodwill A/c                                Dr. (for bringing cash for goodwill)

New Partner's Current A/c                                  Dr. (for unpaid goodwill)

To Old Partner's Capital A/c (New partner's share shared in sacrificing ratio)

Existing Goodwill

Existing Goodwill is Written off:

Old goodwill should always be written off among old partners in the old ratio by passing the following entry:

Old Partners’ Capital A/cs                      Dr.   (Existing Goodwill written off in Old Profit-Sharing Ratio.)

To Goodwill A/c

Note: If Partners' Capitals are Fixed, Current Accounts are to be used instead of their Capital Accounts.

Hidden Goodwill on Admission of Partner

You can watch video in Hindi: Treatment of Goodwill on Admission

Adjustments on Admission of New Partner

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Accounting Treatment

(a) If at the time of admission of the new partner any Accumulated Profits/Reserves appear in the Balance Sheet, these will be distributed among the old partners in the old ratio by passing the following journal entry:

General reserve                                 Dr.

Reserve Fund                                    Dr.

Profit & Loss A/c                              Dr.

Workman's Compensation Reserve A/c            Dr.

Investment Fluctuation Fund A/c               Dr.

Contingency Reserve A/c                       Dr.

To Old Partner's Capital A/c (in old ratio)

(b)For distribution of accumulated losses:

Old Partner's Capital A/c                       Dr.

To Profit & Loss A/c

Capital Accounts of the partners on admission of partner

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There are two main cases of capital adjustment, any other case given in question originates from these cases only. So, students should understand these well.

Two cases for the adjustment of capitals

1. When the new partner’s capital is not given (he has to bring in the proportionate capital/according to his share of profit).

2. When new partner’s capital is given (the capitals of old partners are adjusted on the basis of new partner's capital).

Adjustment of Capitals on Admission

1. When the new partner’s capital is not given

(he has to bring in the proportionate capital/according to his share of profit).

Following steps are taken:

1.    Calculate the capitals of old partners after making all the adjustments.

2.    Calculate the total capital of the new firm as follows:

Total capital = Combined capitals of old partners after making all the adjustments x Reciprocal of combined share of old partners in the new firm.

3. Calculate the Capital of new partner as follows:

New Partner’s Capital = Total capital (as per step 2 above) – combined capitals of old partners after making all the adjustments (as per step 1 above).

2. When new partner’s capital is given

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

Following steps are taken:

1. Calculate Total Capital of the New Firm:

Total capital of the new firm = New Partner's capital × reciprocal of new partner’s share

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

3. Show these capitals as closing capitals in the capital accounts and calculate the surplus or deficiency, as the case may be. (As given in the question.)

In case of the absence of any specific instruction the deficiency /surplus is adjusted by bringing in or withdrawing cash and not through current account.

Balance Sheet after Admission of new partner

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Partners' Capitals can be Fixed or Fluctuating. Whatever may be the type, the entries will be made as per the following sides:

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Precautions to be taken

Precautions while preparing Balance sheet of the new firm after Admission of a new partner

• Capitals of all the partners should be as per new profit-sharing ratio.
• All the Accumulated profits/losses should be shared in old profit-sharing ratio or as instructed in the question, so, should not be taken to the new balance sheet, if already distributed.
• All the assets/liabilities revalued should be shown at revised values in the new balance sheet, including cash/bank balance.

Retirement of Partner

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There is change in the profit-sharing ratio of the existing partners also, depending on the partnership agreement. There can be following cases in this regard:

New Profit-Sharing Ratio - Case I

When new partner's share is given but the question is silent about the share/sacrifice/surrendered share of the old partners then it is assumed that the old partners will share the remaining share in their old profit-sharing ratio.

Example:

A and B are partners sharing profits in the ratio 3:2. They admit C for 1/3 share in future profits.

Total profit = 1

C's Share = 1/3

Remaining Profit = 1 - 1/3 = 2/3

This remaining share of 2/3 will be shared between A and B in the ratio 3:2

So A's share = 2/3 × 3/5 = 6/15

B's share = 2/3 × 2/5 = 4/15

C's share = 1/3 × 5/5 = 5/15

New ratio = 6/15: 4/15: 5/15 = 6:4:5

[Denominators must be made equal while calculating the ratio and new ratio must be written in the same sequence, taking the new partner in the end. To check, the total of the numerators should be equal to the denominator. ]

Case II

When new partner purchases/gets/acquires/takes his share from old partners in a particular ratio then the new ratio of the old partners will be calculated by subtracting the proportion given to the new partner from the shares of old partners.

Example:

A and B are partners sharing profits in the ratio 3:2. They admit C as new partners for 1/3 share in future profits which he gets 1/9 from A and 2/9 from B.

A's old share = 3/5[‘C gets’ means, A gives/ sacrifices in favor of C i.e. 1/9]

So, A's new share = 3/5 - 1/9 = 22/45

B's old share = 2/5[‘C gets’ means, B gives/ sacrifices in favor of C i.e. 2/9]

So, B's new share = 2/5 - 2/9 = 8/45

C's new share = 1/9 x 5/5 = 5/45

New ratio = 22: 8: 5

Case III

When the old partners surrender/give/sacrifice a particular fraction/share of their share in favor of new partner.

Example:

A and B are partners sharing profits in the ratio 3:2. They admit C as a new partner for whom A surrenders 1/3^rd of his share and B surrenders 2/3^rd of his share.

A's old share = 3/5 and A surrenders/sacrifices/gives in favor of C = 3/5 x 1/3 = 3/15

A's new share = 3/5 - 3/15 = 6/15

B's old share = 2/5 and B surrenders/sacrifices/gives in favor of C = 2/5 x 2/3 = 4/15

B's new share = 2/5 - 4/15 = 2/15

C's share = 3/15 + 4/15 = 7/15[share taken from A and B combined]

New ratio = 6:2:7

New Profit Sharing Ratio on Admission

Case IV

When a new partner acquires/takes/purchases his share entirely/wholly from the new partner.

Example:

A and B are partners sharing profits in the ratio 3:2. They admit C for 1/5^th share in profits which he acquires entirely from A.

A's old share = 3/5 and A sacrifices in favor of C = 1/5

A's new share = 3/5 - 1/5 = 2/5

B's share = 2/5[remaining as before]

C's share = 1/5[taken from A]

New ratio = 2:2:1

Case V

When a new partner acquires/purchases/takes/gets his share from the old partners in a certain ratio.

Example:

A and B are partners sharing profits in the ratio 3:2. C is admitted for 1/3^rd share which he acquires from A and B in the ratio of 2:1.

A's old share = 3/5, [C acquires means A’s sacrifice] = 2/3 × 1/3 = 2/9

A's new share = 3/5 - 2/9 =17/45

B's old share = 2/5, [C acquires means B's sacrifice = 1/3× 1/3 = 1/9

B's new share = 2/5 - 1/9 = 13/45

C's share = 1/3 ×15/15 =15/45

New ratio = 17:13:15

Some students find it difficult to make calculations.

You must check Brief Lesson in Maths required for Accountancy

Treatment of Goodwill on Admission of Partner

Test Your Understanding 

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