On 1st April, 2023, a partnership firm had assets pf Rs 2,00,000

18 :- On 1^st April, 2023, a partnership firm had assets of Rs 2,00,000 including cash of Rs 6,000 and bank balance of Rs 14,000. The partners’ capital accounts showed a balance of Rs 1,90,000 and reserves constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs 60,000 at 4 years purchase of super profits, find the average profits of the firm.

Solution :- Calculation of Average profit of the firm
Goodwill = Super profits x 4 years of purchase
Goodwill – (Average profit – Normal profit) x 4
Rs 60,000 = (Average profit – Rs 20,000) x 4
Average profit – Rs 20,000 = 60,000/4
Average profit = 15,000 + 20,000
Average profit = Rs 35,000

Calculation of normal profit of the firm
Capital Employed = Assets – Outside liabilities
= Rs 2,00,000 – 0
= Rs 2,00,000
Normal profit = Capital employed x normal rate of return
= 2,00,000 x 10%
= Rs 20,000