On 1st April, 2018, a firm had assets of Rs 1,00,000

32 :- On 1^st April 2018, a firm had assets of Rs 1,00,000 excluding stock of Rs 20,000. The current liabilities were Rs 10,000 and the balance constituted partner’s capitals accounts. If the normal rate of return is 8% the goodwill of the firm is valued of Rs 60,000 at four years purchase of super profit, find the actual profits of the firm.

Solution:-

Total assets = Assets (excluding stock) +  Stock
    = 1,00,000 + 20,000
                     = Rs 1,20,000

Capital employed = Total assets – Outside liabilities
                             = 1,20,000 – 10,000
                           = Rs 1,10,000

Normal profit = Capital employed x Normal rate of return
                      = 1,10,000 x 8/100
                      = Rs 8,800

Calculation of Actual profits
Goodwill = Super profit x No. of years purchase
               = (Average profit – Normal profit) x No. of years purchased
60,000 = (Average profit – 8,800) x 4

Average profit = 60,000/4 + 8,800
                       = 15,000 + 8,800
                       = Rs 23,800