Question

on April 1st 2020 an existing firm had assets of 500000 including cash of 20000 the firm had a General Reserve of 90000 partner capital accounts showed balance of 380000 and creditors amounted to 30000 if the normal rate of return is 20% and the goodwill of the firm is valued at 64000 at 4 years purchase of super profit find average profits of the firm ​

Answer 1

Answer:

The answer is 1,10,000

Explanation:

Super Profit = Goodwill / No. of purchase years

Super Profit = 64000 / 4

Super Profit = 16000

Capital Employed = Assets - Creditors

Capital employed = 5,00,000 - 30,000

Capital Employed = 4,70,000

                      Or

Capital Employed = Partner's capital + General Reserve

Capital Employed = 3,80,000 + 90,000

Capital Employed = 4,70,000

Normal Profit = 20% of 4,70,000

Normal Profit = 94000

Super Profit = Average Profit -  Normal Profit

16000 = Average profit - 94000

Average Profit =  16000 + 94000

Average profit = 1,10,000

Answer 2

GIVEN:  Assets = 5,00,000 Goodwill of the firm = 64,000

TO FIND:  Average Profit

SOLUTION:

Super Profit = $\frac{Goodwill}{Number of purchase year }$

Super Profit = $\frac{64,000}{4}$

                   = 16,000

Capital Employed = Assets - Creditors

                              5,00,0000 - 30,000

                           = 4,70,000

There is another formulae to calculate capital employed.

Capital Employed = Partner's Capital + General Reserve

                              = 3,80,000 + 90,000

                              = 4,70,000

Normal Profit = 20% of 4,70,000

Normal Profit = 94,000

Super Profit = Average Profit - Normal Profit

16,000 = Average Profit - 94,000

Average Profit = 94,000 + 16,000

                       = 1,10,000

Average Profit is 1,10,000