Question

On 1st April 2012, frm had assets of 5,00,000 including cash of Rs 20,000. The firm had a reserve fund of Rs 90,000,partners capital a/c showed a balance of Rs 3,80,000 and creditors amounted to Rs 30,000. If the normal rate of return is 20 % and the goodwill of the firm is valued at Rs 64,000 at 4 years ofsuper profit, find the average profits of the firm.
how do you solve this problem?

Answer 1

Hey Aliaanna, the solution to your query is here.
$$\begin{gathered} \mathrm{Capital}\mathrm{Employed}=\mathrm{Total}\mathrm{Assets}-\mathrm{Outside}\mathrm{Liabilities} \\ =5,00,000-30,000\left(\mathrm{Creditors}\right)=\mathrm{Rs}4,70,000 \\ \mathrm{Normal}\mathrm{Profit}=\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Rate}}{100} \\ =4,70,000\times \frac{20}{100}=\mathrm{Rs}94,000 \\ \mathrm{Super}\mathrm{Profit}=\frac{\mathrm{Value}\mathrm{of}\mathrm{Goodwill}}{4}=\frac{64,000}{4}=\mathrm{Rs}16,000 \\ \mathrm{Average}\mathrm{Profit}=\mathrm{Super}\mathrm{Profit}+\mathrm{Normal}\mathrm{Profit} \\ =16,000+94,000=\mathrm{Rs}1,10,000 \end{gathered}$$