When goodwill has to be inferred from the arrangement of capital and profit sharing ratio, it is called..........

Hidden goodwill

The correct answer is option 1- Hidden goodwill.

When goodwill has to be inferred from the arrangement of capital and profit sharing ratio, it is called Hidden goodwill.

Hidden Goodwill refers to the goodwill that exists in a partnership but is not shown in the books and accounts. It is typically not disclosed to the partners and is often inferred from the arrangement of capital and profit- sharing ratios. Suppose, A and B are partners sharing profits equally with capitals of Rs. 45,000 each. They admitted C as a new partner for one-third share in the profit. C brings in Rs. 60,000 as his capital. Based on the amount brought in by C and his share in profit, the total capital of the newly constituted firm works out to be Rs.1,80,000 (Rs. 60,000 × 3). But the actual total capital of A, B and C works out as Rs. 1,50,000 (Rs. 45,000 + Rs. 45,000 + Rs. 60,000). Hence, it can be inferred that the difference is on account of goodwill i.e., Rs. 30,000 (Rs. 1,80,000 – Rs. 1,50,000). Which is to be shared equally (old ratio) by A and B. This shall raise their capital accounts to Rs. 60,000 each and total capital of the firm to Rs. 1,80,000. In this, C’s Current account will be debited by Rs. 10,000 (his share of goodwill) and A and B’s Capital accounts credited by Rs. 5,000 each.