Question

On 1st April, 2018, an existing firm had assets of ₹ 75,000 including cash of ₹ 5,000. Its creditors amounted to ₹ 5,000 on that date. The firm had a Reserve of ₹ 10,000 while Partners Capital Accounts showed a balance of ₹ 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at ₹ 24,000 at four years purchase of super profit, find average profit per year of the existing firm.

Answer 1

Solution:

Average Profit = Normal Profit + Super Profit

Capital Employed = Total Assets - Creditors

                              = 75, 000 - 5, 000

                              =70, 000  

Normal Profit = Capital Employed x $\frac{Normal Rate of Return}{100}$  

                      = 70, 000 x $\frac{20}{100}$

                      = 14,000

Goodwill of the firm =24, 000

Number of years purchase = 4

Super Profit  = $\frac{24, 000}{4}$  = 6,000

Average Profit = Normal Profit+ Super Profit  

Average Profit = 14,000 +  6,000 = 20,000

Answer 2

Answer:

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