On April 1, 2018 an existing firm had assets of Rs. 75,000 including cash of Rs. 5,000. The partner's capital accounts showed a balance of Rs. 60,000 and reserve constituted the rest. If the normal rate of return is 10% and the goodwill of the firm is valued at Rs. 24,000 at 4 year's purchase of Super profits, find the average profits of the firm.

Explanation

Goodwill = Super Profit `xx` 4 year's purchase
24,000 = Super Profits `xx` 4
Super Profits = `(24,000)/(4)`= Rs. 6,000
Normal Profits = `("Capital employed"^((1)) xx "Normal Rate of Return")/(100)`
` = 75,000 xx (10)/(100) =` Rs. 7,500
Super Profit = Average Profits - Normal Profits
Hence, Average Profits = Super Profits + Normal Profits
= Rs. 6,000 + Rs. 7,500 = Rs. 13,500.
Note 1. Capital Employed (or Net Assets) = Assets - Liabilities. In this question, Assets are Rs. 75,000 and LIabilitiies nil. Hence, Capital Employed will be Rs. 75,000.