On 1st April, 2025, an existing firm had assets of Rs 75,000

 17 :-  On 1^st April, 2025, an existing firm had assets of Rs 75,000 including cash of Rs 5,000. Its creditor amounted to Rs 5,000 on that date. The firm had a reserve of Rs 10,000 while partner’s capital accounts showed a balance of Rs 60,000. If normal rate of return is 20% and goodwill of the firm is valued at Rs 24,000 at four years purchase of super profit, find average profit per year of the existing firm.

Solution :-

Capital employed = Total assets – Total liabilities
                             = 75,000 – 5,000
                             = Rs 70,000

Normal profit = Capital employed x Normal rate of return
                      = 70,000 x 20%
                      = Rs 14,000

Goodwill = Super profit x No. of years purchased
Goodwill = (Average profit – Normal profit) x No. of years purchased
24,000/4 = Average profit – 14,000
6,000 = Average profit – 14,000
Average profit = 6,000 + 14,000
Average profit = Rs 20,000