Question

On April 1^st 2024, an existing firm had assets of ₹ 5,00,000 including cash of ₹ 20,000. The firm had a General Reserve of ₹ 90,000, partner’s capital accounts showed a balance of ₹ 3,80,000 and creditors amounted to ₹ 30,000. If the normal rate of return is 20% and the goodwill of the firm is valued at ₹ 64,000 at 4 year’s purchase of super profit, find the average profits of the firm.

Answer 1

Given:

Total Assets = ₹ 5,00,000

General Reserve = ₹ 90,000

Partners’ Capital = ₹ 3,80,000

Creditors = ₹ 30,000

Normal Rate of Return (NRR) = 20%

Goodwill = ₹ 64,000

Goodwill is valued at 4 years’ purchase of super profit.

Capital Employed (Net Assets) = Total Assets − Outside Liabilities

= 5,00,000 − 30,000 

= 4,70,000

Goodwill = Super Profit × No. of Years’ Purchase

64,000 = Super Profit × 4

Super Profit = `(64,000)/4`

= 16,000

Normal Profit = Capital Employed `xx "NRR"/100`

= `4,70,000 × 20/100`

= 94,000

Super Profit = Average Profit − Normal Profit

16,000 = Average Profit − 94,000

Average Profit = 16,000 + 94,000

Average Profit = 1,10,000