Step 1: Concept Clarification.
Hidden goodwill is an unrecorded value determined by contrasting implied capital with actual capital.
Step 2: Calculation Formula: \[ \text{Hidden Goodwill} = \text{Total Capital of the Firm (based on share)} - \text{Combined Actual Capital} \]
Step 3: Practical Example.
When a new partner contributes capital proportionate to their ownership stake, and the firm's total capital derived from this share surpasses the combined actual capital, the surplus represents hidden goodwill.
If the capital employed in a business is Rs 5,00,000, the average profit is Rs 60,000, and the normal rate of return is 6 %, the goodwill by the Capitalisation of Average Profit Method will be: