Question

$A$ and $B$ are partners in a firm with capital of $Rs.1,20,000$ respectively. They decide to admit $C$ into the partnership for $1/4^{th}$ share in the future profits. $C$ is to bring in a sum of $Rs.70,000$ as his capital. Calculate amount of goodwill.

Answer 1

Goodwill is the reputation of a business earned over some years represented in monetary terms. Whenever there is a change in the constitution of a partnership by way of admission,retirement or death, a valuation of goodwill is necessary.

In the given question we have to calculate hidden goodwill. Hidden goodwill is the goodwill which is not given in the question and we have to calculate it on the basis of total capital of the firm and other given information.

C's share is 1/4th and he brings 70,000 as his capital.

Total capital = 70,000 * 4 = 2,80,000

3/4th capital = 2,80,000-70,000 = 2,10,000

Total capital of A and B = 1,20,000+1,20,000 = 2,40,000

Value of goodwill = Difference between old and new capital

= 2,40,000 - 2,10,000 = 30,000

For 1/4th share, C is bringing 70,000 as capital. So,the new capital of the firm on the basis of C's capital is 2,80,000. A and B capital according to their ratio i.e 1:1 should be 2,10,000/2 = 1,05,000 each. So,the excess is goodwill.