Question

From the information given below, find the average profits of the partnership firm of Sudhir and Sana.

1. The firm has total assets of ₹ 4,80,000.
2. The partner’s capital accounts show a balance of ₹ 4,00,000.
3. The firm has reserves of ₹ 30,000 and creditors of ₹ 50,000.
4. The normal rate of return from the capital invested in the same class of business is 10%.
5. The self-generated goodwill of the firm is valued at ₹ 1,80,000 at 3 year’s purchase of super profits.

Answer 1

1. Calculation of Capital Employed

Capital Employed can be calculated using either the Liabilities side approach or the Assets side approach. Both will give you the same result.

Liabilities Side Approach: \[\text{Partners' Capital} + \text{Reserves}\]

$$\text{₹4,00,000} + \text{₹30,000} = {₹4,30,000}$$ 

Assets Side Approach: $\text{Total Assets} - \text{External Liabilities (Creditors)}$

$$\text{₹4,80,000} - \text{₹50,000} = {₹4,30,000}$$ 

2. Calculate Normal Profit

Normal Profit is the expected return on the capital invested in the business.

$$\text{Normal Profit} = \text{Capital Employed} \times \frac{\text{Normal Rate of Return}}{100}$$ 
$$\text{Normal Profit} = ₹4,30,000 \times \frac{10}{100} = {₹43,000}$$

3. Calculation of Super Profit

Goodwill is valued based on Super Profits. We can work backward using the given goodwill amount.

$$\text{Goodwill} = \text{Super Profit} \times \text{Number of Years' Purchase}$$

$$₹1,80,000 = \text{Super Profit} \times 3$$ 
$$\text{Super Profit} = \frac{₹1,80,000}{3} = {₹60,000}$$

Calculation of Average Profit

Now, we find the Average Profit using the relationship between Super Profit and Normal Profit.

$$\text{Super Profit} = \text{Average Profit} - \text{Normal Profit}$$

$$₹60,000 = \text{Average Profit} - ₹43,000$$

$$\text{Average Profit} = ₹60,000 + ₹43,000 = {₹1,03,000}$$