Question

On 1st April, 2023, the books of the firm of Kashish and Sagar showed assets of ₹9,00,000 including cash of ₹32,000 and bank balance of ₹1,68,000. The partners’ capital accounts showed a balance of ₹6,00,000 and reserves constituted the rest. If the normal rate of return is 8% and the goodwill of the firm is valued at ₹4,00,000 at 5 years purchase of super profits, find the average profits of the firm.

Hint:

The formula for goodwill based on super profits is: \[ \text{Goodwill} = \text{Super Profits} \times \text{Years Purchase}. \] Always calculate super profits by subtracting normal profits from average profits.

Answer 1

Step 1: Calculate the capital employed. \[ \text{Capital Employed} = \text{Total Assets} - \text{Cash and Bank Balance} \] \[ \text{Capital Employed} = ₹9,00,000 - (₹32,000 + ₹1,68,000) = ₹7,00,000 \] Step 2: Calculate the normal profits. \[ \text{Normal Profits} = \text{Capital Employed} \times \text{Normal Rate of Return} \] \[ \text{Normal Profits} = ₹7,00,000 \times 8% = ₹56,000 \] Step 3: Calculate the super profits. \[ \text{Goodwill} = \text{Super Profits} \times \text{Years Purchase} \] \[ \text{Super Profits} = \frac{\text{Goodwill}}{\text{Years Purchase}} \] \[ \text{Super Profits} = \frac{₹4,00,000}{5} = ₹80,000 \] Step 4: Calculate the average profits. \[ \text{Average Profits} = \text{Normal Profits} + \text{Super Profits} \] \[ \text{Average Profits} = ₹56,000 + ₹80,000 = ₹1,36,000 \] Final Answer: The average profits of the firm are \( \boxed{₹1,36,000} \).