(Calculation of Average Profit).
On 1st April, 2018, a firm had assets of Rs. 3,00,000 including cash of Rs. 5,000. The Partners' Capital Accounts showed a balance of Rs. 2,00,000 and the Reserve constituted the rest. If the normal rate Of return is `10%` and the goodwill of the firm is valued at Rs. 2,00,000 at four years' purchase fo super profit, find the average profit of the firm.

Explanation

Goodwill = Super Profit `xx` Number of Years' Purchase
Rs. 2,00,000 = Super profit `xx` 4
Super Profit = `(Rs. 2,00,000)/(4)` = Rs. 50,000
Normal Profit = Capital Employed `xx` Normal Rate of Return/100
` " " ` = Rs. 3,00,000 `xx` 10/100 = Rs. 30,000
Super Profit = Average Profit - Normal Profit
Rs. 50,000 = Average Profit - Rs. 30,000
Average Profit = Rs. 50,000 + Rs. 30,000 = Rs. 80,000.
Note: As outside liabilities are not given, they are assumed to be nil. Thus, capital employed is equal to Total Assets.