Question

How is hidden goodwill calculated?

Answer 1

Hidden goodwill is calculated by finding the difference between the required capital of the firm and the actual combined capital of all the partners.
For example, P and Q are partners with capitals of ₹ 1,00,000 each. R is admitted with a `1/4`th share, and he brings ₹ 1,20,000 as his capital. The Profit and Loss Account shows a credit balance of ₹ 50,000 on the date of admission of R.

On the basis of R’s capital, the total capital of the firm should be ₹ 4,80,000 `(₹ 1,20,000 xx 4/1)`. But the actual total capital of the firm is ₹ 3,70,000 (₹ 1,00,000 of A + ₹ 1,00,000 of B + ₹ 50,000 for the Profit and Loss Account + ₹ 1,20,000 of C). As such, the hidden goodwill will be ₹ 1,10,000 (i.e., ₹ 4,80,000 − ₹ 3,70,000).