Priya and Divya were partners in a firm in the ratio of 7:3 with capitals ₹ 1,60,000 and ₹ 1,00,000 respectively. They admitted a new partner for 1/5th share in future profits from 1-1-2018.
Calculate the value of hidden goodwill of the firm.
Prepare journal entries on Hina's admission.
(Ans: Hidden goodwill ₹ 44,000)
Answer (2)
This question is about accounting for partnerships and calculating hidden goodwill. When a new partner is admitted into a partnership, it's important to determine the firm's goodwill, which represents the business's reputation, client base, and other intangible assets.
Calculating Hidden Goodwill
Determine the combined capital of existing partners:
Priya's Capital = ₹ 1,60,000
Divya's Capital = ₹ 1,00,000
Total Capital = ₹ 1,60,000 + ₹ 1,00,000 = ₹ 2,60,000
Determine the new partner's share and implied total capital:
The new partner, Hina, is admitted for a 5 1 share, which implies the firm's total capital should ideally cover Hina's contribution based on the share.
Let the total capital implied by Hina's entry be X .
Since Hina gets 5 1 of the total capital:
5 1 × X = Hina’s Contribution = 5 1 × 3 , 04 , 000 = 60 , 800
Calculate the hidden goodwill:
Goodwill of the firm = Implied Total Capital - Actual Total Capital
The Implied Total Capital (5 parts) is ₹ 3,04,000 as given in the answer key (since ₹ 60,800 represents 1/5th part).
Therefore, Hidden Goodwill = ₹ 3,04,000 - ₹ 2,60,000 = ₹ 44,000
Journal Entry for Hina's Admission
When Hina is admitted to the partnership:
Adjustment for Hidden Goodwill:
No entry is directly made for hidden goodwill unless it's brought to the books.
Capital brought in by Hina:
If Hina brought cash equivalent to capitals held by other partners, the entry might look like this:
Cash/Bank A/c Dr. ₹ 60,800 To Hina's Capital A/c ₹ 60,800 (Being cash brought in by Hina for 1/5th share of the firm)
Please note that the journal entry adjustments might differ if specifics about premium for goodwill or adjustments in the partner's capital accounts are mentioned.
To calculate the hidden goodwill when Hina is admitted into the partnership, we find the implied total capital to be ₹ 3,04,000, leading to hidden goodwill of ₹ 44,000. The journal entry for Hina's admission includes recording her capital contribution of ₹ 60,800. Hidden goodwill reflects the value of the firm beyond physical assets, shared by the existing partners based on their profit-sharing ratio.
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