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Admission of a New Partner

Hidden Goodwill

Goodwill represents the reputation of a firm. Which provides some extra benefits/profits in the future in comparison to other firms. It builds up when the business has continued for some time. This is treated as intangible assets in accounts. It is not a fictitious asset. Hidden Goodwill may be defined as the value of a firm. Its effect is extra profit which firms earn over the normal rate of profit in the future.

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Hidden Goodwill

Hidden Goodwill means the value of goodwill that is not specified at the time of admission of a partner. If the new partner requires to bring the share of goodwill, then, in this case, we have to calculate the value of the firm’s goodwill.

Difference between the capitalized value of the firm and the net worth of the firm is treated as the value of Hidden Goodwill. In other words, we can say hidden Goodwill is the Inferred Goodwill. This is not given in question but is implied from brought in capital by the new partner for his share in the firm.

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Learn more about Revaluation Account here in detail.

Example: M and N are two partners in a firm with the capital balances of ₹ 1,60,000 and ₹ 2,20,000 respectively. The firm had a general reserve of ₹ 40,000. They admitted P into the firm for the 1/4th share of profits. He brings capital of ₹ 1,80,000. Calculate the firm’s goodwill and P’s share of goodwill.

Solution

Value of Goodwill = Capitalised Value of Firm – Net Worth

Capitalised Value of Firm = P’s Capital × Reciprocal of his Share

Net Worth = Total Capital (including P’s Capital) + Reserve

Net Worth = (1,60,000 + 2,20,000 + 1,80,000) + 40,000 = 6,00,000

Value of Goodwill = 7,20,000 – 6,00,000 = 1,20,000

Now we are going to discuss accounting treatment of Hidden Goodwill.

Hidden Goodwill

 

Accounting treatment of Hidden Goodwill

When the value of Goodwill of a firm is not specified, the value of Goodwill has to be calculated and adjusted as follows:

Particular Amount
New partner capital *Reciprocal of new partner share XXX
Less: Total capital (including new partner capital) XXX
Value of Goodwill XXX

 

Following is the Journal Entry

Date Particular   Amount (Dr.) Amount (Cr.)
 

 

New Partner’s capital A/c  Dr.  XXX
     To Old Partner’s capital A/c  Cr.  XXX
(Being new partner’s share of hidden  Goodwill adjusted through old partner’s capital account)

Solved Question on Hidden Goodwill

Amar and Akbar are in partnership sharing profits and losses equally. The Balance sheet of M/s. Amar and Akbar as on 31.12.2016 is:

Liabilities Amount Assets Amount
Capital A/c: Sunday fixed Assets 30000
Amar 22500 Inventories 15000
Akbar 22500 Bank 10000
Trade payables 10000
55000 55000

 On 1.1.2017 they agree to take Anthony as a 1/3rd partner to increase the capital base to ₹67500. Anthony agrees to pay ₹ 30000. Show the necessary journal entries and prepare the partner’s capital accounts.

Ans:

In the Books of M/s. Amar Akbar and Anthony

Journal Entries

Date Particulars   Amount

(Dr.)

Amount

(Cr.)

1. Bank A/c  Dr. 30000
     To Anthony capital A/c  Cr 30000
(cash brought in by Anthony for 1/3rd share)
2. Anthony capital A/c  Dr. 7500
    To Amar capital A/c  Cr. 3750
    To Akbar capital A/c  Cr. 3750
(Being amount adjusted through partner’s capital accounts)
3 Amar capital A/c  Dr. 3750
Akbar capital A/c  Dr. 3750
     To Bank A/c  Cr. 7500
(Amount of Goodwill will due to Amar and Akbar withdrawn)

Partner’s capital A/c

Particulars Amar Akbar Anthony Particulars Amar Akbar Anthony
To Amar 3750 By Balance b/d 22500 22500
To Akbar 3750 By  Bank 30000
To Bank 3750 3750 By Anthony 3750 3750
To Balance c/d 22500 22500 22500
  26250 26250 30000   26250 26250 30000

Workings:

  • Old profit sharing Ratio 1:1
  • New profit sharing Ratio 1:1:1
  • Anthony share of capital ₹67500×1/3=22500
  • Goodwill ₹30000 -22500=7500 for 1/3rd share

Total Goodwill is 7500×3=22500

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Pawan Kumar

New ratio of question no. 5 is 17:16:8 among all three partners. Please check your answer

Pawan Kumar
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Pawan Kumar

Sory 17:15:8

Rtdyy
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Rtdyy

1/8X7/8=4/32 how?

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