Question

Mansi and Uma were partners in a firm and their capitals were ₹ 4,00,000 and ₹ 2,00,000 respectively. Normal rate of return in a similar business was 15% and the goodwill of the firm was valued at ₹ 4,00,000. If goodwill was calculated at four years purchase of super profits, the average profits of the firm were ______.

Options

• ₹ 90,000

• ₹ 60,000

• ₹ 1,00,000

• ₹ 1,90,000

Answer 1

Mansi and Uma were partners in a firm and their capitals were ₹ 4,00,000 and ₹ 2,00,000 respectively. Normal rate of return in a similar business was 15% and the goodwill of the firm was valued at ₹ 4,00,000. If goodwill was calculated at four years purchase of super profits, the average profits of the firm were ₹ 1,90,000.

Explanation:

1. Calculate Total Capital Employed:

Capital Employed = Mansi’s Capital + Uma’s Capital

Capilat Employed = 4,00,000 + 2,00,000 = 6,00,000

2. Calculate Normal Profit:

Normal Profit = Capital Employed × `"Normal Rate of Return"/100`

Normal Profit = 6,00,000 × `15/100 = 90,000`

3. Calculate Super Profit:

Goodwill = Super Profit × Number of Years Purchase

4,00,000 = Super Profit × 4

Super Profit = `(4,00,000)/4 = 1,00,000`

4. Calculate Average Profit:

Super Profit = Average Profit − Normal Profit

1,00,000 = Average Profit − 90,000

Average Profit = 1,00,000 + 90,000 = 1,90,000