On 1st April, 2018 an existing firm had assets of Rs. 2,00,000 including cash of Rs. 4,000. Its creditors amounted to Rs. 10,000 on that date. The partner's capital accounts showed a balance of Rs. 1,60,000 while the general reserve amounted to Rs. 30,000. If the normal rate of return is 15% and the goodwill of the firm is valued at Rs. 36,000 at 3 year's purchase of super profit, find the average profits of the firm.

Explanation

Goodwill = Super Profit `xx` 3 year's purchase
36,000 = Super Profits `xx` 3
Super Profits = `(36,000)/(3)=` Rs. 12,000
Capital Employed = Assets - Creditors
= Rs. 2,00,000 - Rs. 10,000 = Rs, 1,90,000.
OR
=Partner's Capital + General Reserve
= Rs. 1,60,000 + Rs. 30,000 = Rs. 1,90,000
Normal Profits = `("Capital Employed" xx "Normal Rate of Return")/(100)`
= Rs. 1,90,000 `xx (15)/(100) =` Rs. 28,500
Super Profits = Average Profits - Normal Profits
Hence, Average Profits = Super Profits + Normal Profits
= Rs. 12,000 + Rs. 28,500 = Rs. 40,500.