Question

On 1st April, 2018, an existing firm had assets of Rs 75,000 including cash of 5,000. Its creditors amounted to 5,000 on that date. The firm had a Reserve Fund of 10,000 while Partners' Capital Accounts showed a balance of ` 60,000. If the normal rate of return is 20% and profit earned by the firm is Rs 30,000 including claim received Rs.10,000 on account of goods lost by fire. find the value of Goodwill at four years' purchase of super profit. Calculate 1.Capital Employed 2.Normal profit 3.Actual Profit 4. Super Profit 5. Goodwill.​

Answer 1

Answer:

On 1st April, 2018, an existing firm had assets of Rs. 75,000 including cash of Rs.5,000. Its creditors amounted to Rs. 5,000 on that date. The firm had a Reserve of Rs. 10,000 while Partners Capital Accounts showed a balance of Rs. 60,000. If Normal Rate of Return is 20% and goodwill of the firm is valued at Rs. 24,000 at four years purchase of super profit, find average profit per year of the existing firm.Read more on Sarthaks.com - https://www.sarthaks.com/466855/1st-april-2018-existing-firm-had-assets-000-including-cash-000-its-creditors-amounted-000

Explanation:

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Answer 2

Step 1: Calculation of Capital Employed:

Capital Employed= Total assets- Creditors

                              = 75000-5000

                              = 70000

Step 2: Calculation of Normal Profit:

Normal Profit= Capital Employed* [Normal Rate Of Return/100]

                      = 70000* [20/100]

                      = 14000

Step 3: Calculation of Super Profit from Goodwill:

Super Profit= Goodwill/ Number of year's of purchase

                   = 24000/4

                   = 6000

Step 4: Calculation of Average Profit from Super Profit:

Average Profit= Super Profit+ Normal Profit

                        = 14000+6000

                        = 20000