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
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’ Capital + 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 Capital a/c (share in hidden goodwill) Dr.
To Old Partner’s Capital A/c (in sacrifice ratio)