Hidden Goodwill – How to Calculate and Example

Hidden Goodwill Calculation and Example

The amount of goodwill not given in the question is known as hidden goodwill. 

What is the Hidden Goodwill :

At the time of admission of a new partner, the amount of goodwill is not specified in the books, But the new partner has to bring his share of goodwill then the amount of goodwill is calculated, this amount is known as Hidden Goodwill. It is also known as Inferred Goodwill.

Formula to calculate Hidden Goodwill: – 

The hidden goodwill is calculated by calculating the difference between the capitalized value of the firm and capital invested (net worth) by all partners. The formula is shown as follows: –

Goodwill  Capitalized Value of Firm  Net worth(Capital) of Firm

 

Capitalized Value of Firm  Capital Invested by new Partner  X Reciprocal of his Share

 

Net worth(Capital) of Firm Total Capital (Including New Partner’s share) + All reserve

Illustration of Hidden Goodwill: –

Raj and Ram are the partners in the RamRaj Co. ltd. with capital total balance as on date of admission is Rs 1,50,000 and 1,50,000 respectively. The firm has a balance in the general reserve of Rs 1,00,000. Lakshman joins the partnership with the amount of capital of Rs 2,00,000 for 2/7rd share of profit. Calculate the total amount of Firm goodwill and Lakshman share of goodwill. 

Solution: –

Goodwill  Capitalized Value of Firm  Net worth(Capital) of Firm

 

Capitalized Value of Firm  Capital Invested by new Partner  X Reciprocal of his Share

 

Capitalized Value of Firm  2,00,000 X 7
2

 

Capitalized Value of Firm  7,00,000

 

Net worth(Capital) of Firm Total Capital (Including New Partner’s share) + All reserve

 

Net worth(Capital) of Firm = (1,20,000 + 1,50,000 + 2,00,000) + 90,000

 

Net worth(Capital) of Firm = 5,60,000

 

Goodwill  7,00,000  5,60,000

 

Goodwill of the Firm 1,40,000 

 

Share of Goodwill of Lakshman 1,40,000  X 2/7

 

Share of Goodwill of Lakshman 40,000 

Journal Entries: – 

Date   Particulars
L. F. Debit Credit
         
1. New Partner Capital/Current A/c Dr.   XXXX  
            To Old Partners Capital/Current A/c     XXXX
  (Being amount of Goodwill adjusted)      
         

 

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