Question

What is hidden goodwill? How is it adjusted on the admission of a partner?

Hint:

Hidden goodwill must be carefully calculated and adjusted to maintain transparency and fairness during a partner's admission.

Answer 1

Hidden Goodwill refers to the goodwill that is not explicitly mentioned or agreed upon but is derived indirectly from the valuation of the firm. It is calculated by comparing the total value of the firm (based on the capital brought in by the new partner) with the net tangible assets of the firm. Adjustment on Admission of a Partner:
1. The hidden goodwill is calculated using the formula: \[ \text{Hidden Goodwill} = \text{Total Capital of the Firm} - \text{Net Tangible Assets} \] 2. The goodwill is then credited to the existing partners' capital accounts in their old profit-sharing ratio. 3. If the new partner pays their share of goodwill in cash, it is recorded as a premium for goodwill and distributed among the existing partners. This ensures fair compensation to the existing partners for the firm's goodwill value before admitting the new partner.