Hidden Goodwill on Admission of Partner
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