Question

The net assets of a firm as on March 31 ,2017 were 400000 .if the normal rate of return is 20/ and the goodwill of the firm is valued at 125000 at 5 year's purchase of super profits ,find the average profits of them

Answer 1

Given data:

• The net assets of a firm are Rs 4,00,000.
• The NRR is 20%.
• The goodwill is valued at Rs 1,25,000, worth 5 years' purchase of super profits.

To find: The average profits of the firm.

Answer:

Goodwill = Super profit × Number of years' purchase

We have,

• goodwill = Rs 1,25,000
• number of years' purchase = 5

Substituting them in the formula,

Rs 1,25,000 = Super profit × 5

Super profit = Rs 1,25,000 ÷ 5

Super profit = Rs 25,000

Super profit = Average profit - Normal profit

Normal profit = NRR × Capital employed

Net assets of a firm ⇒ Capital employed

We have,

• NRR = 20%
• capital employed = Rs 4,00,000

Substituting them in the formula,

Normal profit = 20/100 × 4,00,000

Normal profit = Rs 80,000

Coming back to the formula to find the super profit, we have,

• super profit = Rs 25,000
• normal profit = Rs 80,000

Substituting them in the formula,

Rs 25,000 = Average profit - Rs 80,000

Average profit = Rs 25,000 + Rs 80,000

Average profit = Rs 1,05,000

Therefore, the average profit of the firm is Rs 1,05,000.