Question

On April 1, 2024 an existing firm had assets of ₹ 5,00,000 and liabilities of ₹ 1,00,000. If the normal rate of return is 10% and the goodwill of the firm is valued at ₹ 1,20,000 at 4 years' purchase of super profits, average profits of the firm will be:

Options

• ₹ 70,000

• ₹ 80,000

• ₹ 90,000

• ₹ 10,000

Answer 1

₹ 70,000

Explanation:

Super Profit = `(1,20,000)/4 = 30,000`

Normal Profit = `"Capital Employed × Normal rate of return"/100`

Capital Employed = Assets − Liabilities

= 5,00,000 − 1,00,000 = 4,00,000

Normal Profit = `4,00,000 xx 10/100 = 40,000`

Average profit = Super Profit + Normal Profit

= 30,000 + 40,000 = ₹ 70,000