Question

On 1st April, 2018, a firm had assets of ₹ 1,00,000 excluding stock of ₹ 20,000. The current liabilities were ₹ 10,000 and the balance constituted Partners' Capital Accounts. If the normal rate of return is 8%, the Goodwill of the firm is valued of ₹ 60,000 at four years' purchase of super profit, find the actual profits of the firm.

Answer 1

$$\begin{gathered} \mathrm{Total}\mathrm{Assets}\mathrm{of}\mathrm{the}\mathrm{firm}=(\mathrm{Sundry}\mathrm{Assets}+\mathrm{Stock})=₹(1,00,000+20,000)=₹1,20,000 \\ \mathrm{Current}\mathrm{Liabilities}\mathrm{of}\mathrm{the}\mathrm{firm}=₹10,000 \\ \mathrm{Capital}\mathrm{Employed}=(\mathrm{Total}\mathrm{Assets}-\mathrm{Current}\mathrm{Liabilities})=₹(1,20,000-10,000)=₹1,10,000 \\ \mathrm{Normal}\mathrm{Profits}=\left(\mathrm{Capital}\mathrm{Employed}\times \frac{\mathrm{Normal}\mathrm{Rate}\mathrm{of}\mathrm{Return}}{100}\right)=₹\left(1,10,000\times \frac{8}{100}\right)=₹8,800 \\ \mathrm{Goodwill}=\mathrm{Super}\mathrm{Profits}\times \mathrm{No}.\mathrm{of}\mathrm{years}\mathrm{of}\mathrm{purchase} \\ 60,000=\mathrm{Super}\mathrm{Profits}\times 4 \\ \mathrm{Super}\mathrm{Profits}=₹\left(\frac{60,000}{4}\right)=₹15,000 \\ \mathrm{Super}\mathrm{Profits}=\mathrm{Average}\mathrm{Actual}\mathrm{Profits}-\mathrm{Normal}\mathrm{Profits} \\ 15,000=\mathrm{Average}\mathrm{Actual}\mathrm{Profits}-8,800 \\ \mathrm{Average}\mathrm{Actaul}\mathrm{Profits}=₹(15,000+8,800)=₹23,800 \end{gathered}$$