Question

The profits of a partnership firm for the last four years were:

	₹
2019-20	1,00,000
2020-21	(80,000)
2021-22	12,00,000
2022-23	10,00,000

The closing stock for the year 2022-23 was undervalued by ₹ 2,00,000.

The normal rate of return in a similar business is 10%. If the goodwill of the firm is ₹ 6,20,000 at 4 years’ purchase of super profit, find the Capital Employed by the firm.

Answer 1

Actual Average Profit:

Total Profits of last 4 years = ₹ 1,00,000 – ₹ 80,000 + ₹ 12,00,000 + (₹ 10,00,000 + ₹ 2,00,000 Undervaluation of closing stock)

= ₹ 24,20,000

Average Profit = `(24,20,000)/4`

= ₹ 6,05,000

Super Profit = `"Goodwill"/4`

= `(6,20,000)/4`

= ₹ 1,55,000

Normal Profit = Actual Average Profit - Super Profit

= ₹ 6,05,000 – ₹ 1,55,000

= ₹ 4,50,000

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

= `4,50,000 xx 100/10`

= ₹45,00,000