Question

Suhas and Vilas were partners in a firm with capitals of Rs 4,00,000 and Rs 3,00,000 respectively. They admitted Prabhas as a new partner for \( \frac{1}{5} \)th share in future profits. Prabhas brought Rs 2,00,000 as his capital. Prabhas' share of goodwill will be :

• A. Rs 1,00,000
• B. Rs 10,00,000
• C. Rs 9,00,000
• D. Rs 20,000

Hint:

Hidden goodwill is calculated when the new partner's capital contribution implies a higher total firm value than the combined actual capitals. Find Total Implied Capital (New Partner's Capital / New Partner's Share), subtract the Actual Combined Capital (Old Partners' Adjusted Capitals + New Partner's Capital) to get total goodwill. The new partner's share is then calculated based on their profit ratio.

Answer 1

The Correct Option is D

Step 1: Determine the Firm's Total Implied Capital:
Prabhas' capital contribution of Rs 2,00,000 represents a \( \frac{1}{5} \) share. Therefore, the implied total capital of the firm is calculated as: Prabhas' Capital / Prabhas' Share = Rs 2,00,000 / \( \frac{1}{5} \) = Rs 10,00,000.
Step 2: Calculate the Combined Actual Capital of All Partners:
The actual combined capital of all partners is the sum of their individual capital contributions: Suhas' Capital + Vilas' Capital + Prabhas' Capital = Rs 4,00,000 + Rs 3,00,000 + Rs 2,00,000 = Rs 9,00,000.
Step 3: Calculate the Total Hidden Goodwill:
Hidden Goodwill is the difference between the implied total capital and the actual combined capital: Implied Total Capital - Actual Combined Capital = Rs 10,00,000 - Rs 9,00,000 = Rs 1,00,000.
Step 4: Determine Prabhas' Share of the Hidden Goodwill:
Prabhas' share of the hidden goodwill is calculated by multiplying the total hidden goodwill by his profit share: Total Hidden Goodwill \( \times \) Prabhas' Profit Share = Rs 1,00,000 \( \times \) \( \frac{1}{5} \) = Rs 20,000.
Conclusion:
Prabhas is entitled to Rs 20,000 of the hidden goodwill.