Question

A firm’s average net profits of last four years were ₹ 2,50,000. It includes an abnormal profit of ₹ 19,000 each year. The firm had assets of ₹ 15,50,000 including cash of ₹ 20,000, Debtors ₹ 2,35,000 and Stock ₹ 1,15,000. Its creditors were ₹ 3,00,000 and outstanding expenses were ₹ 50,000. The value of the goodwill as per the capitalization of average profit method was valued at ₹ 4,50,000. Find out the Normal Rate of Return.

Answer 1

Given:

Average Profits (including abnormal) = ₹ 2,50,000

Abnormal profit included = ₹ 19,000

Assets = ₹ 15,50,000 (includes Cash ₹ 20,000, Debtors ₹ 2,35,000, Stock ₹ 1,15,000)

Creditors = ₹ 3,00,000

Outstanding Expenses = ₹ 50,000

Goodwill (Capitalisation of Average Profits method) = ₹ 4,50,000

Adjusted Average Profit = 2,50,000 − 19,000

= 2,31,000

Capital Employed = Total Assets − Outside Liabilities

= 15,50,000 − (3,00,000 + 50,000)

= 15,50,000 − 3,50,000 

= 12,00,000

Goodwill = Capitalised Value − Capital Employed

4,50,000 = Capitalised Value − 12,00,000

Capitalised Value = 16,50,000

`"NRR" = ("Adjusted Average Profit")/"Capitalised Value" xx 100`

= `(2,31,000)/(16,50,000) xx 100`

= 14%