A firm had Rs.120,000 worth of fixed assets and Rs.80,000 as current assets on 1st January 2014, on that date creditors of the firm were Rs.20,000, partners capital Rs.170,000 and reserve fund of Rs.10,000. If the Goodwill of the firm is valued at Rs.40,000 on the basis of 4 year purchase of super profit on the basis of 10% return on capital employed. find average profit of the firm
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Explanation:
Capital employed (1st method) = partner's capital + reserve fund = 1,70,000+ 10,000= 1,80,000.
Capital employed ( 2nd method) = total Assets - liabilities.
1,20,000+80,000-20,000= 1,80,000.
NORMAL PROFITS= CAPITAL EMPLOYED ×NORMAL RATE OF RETURN.
=1,80,000×10/100= 18,000.
GOODWILL= SUPER PROFITS× NUMBER OF YEAR'S PURCHASE.
40,000= SUPER PROFITS ×4
SUPER PROFITS =40,000÷4
= 10,000.
SUPER PROFITS = AVERAGE PROFIT- NORMAL PROFIT
10,000=AVERAGE PROFIT-18,000.
AVERAGE PROFIT = 10,000+18,000=28,000
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