Commerce Exam  >  Commerce Questions  >  Average profits of a firm during the last few... Start Learning for Free
Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm?
Most Upvoted Answer
Average profits of a firm during the last few years are rs 80,000 and ...
Problem Statement:

The average profits of a firm during the last few years are Rs 80,000, and the normal rate of return in a similar business is 10%. If the goodwill of the firm is Rs 1,00,000 at 4 years purchase of super profit, find the capital employed by the firm.

Solution:

Step 1: Calculate the Super Profits

Super Profits = Actual Profits - Normal Profits

Super Profits = Rs 80,000 - (10% of Capital Employed)

Super Profits = Rs 80,000 - (10/100) * Capital Employed

Super Profits = Rs 80,000 - (1/10) * Capital Employed

Super Profits = Rs 80,000 - (1/10) * C ----(1)


Step 2: Calculate the Value of Goodwill

Value of Goodwill = Super Profits * Number of Years Purchase

Value of Goodwill = Super Profits * 4

Value of Goodwill = 4 * (Rs 80,000 - (1/10) * C)

Value of Goodwill = Rs 3,20,000 - (4/10) * C ----(2)


Step 3: Equate the Value of Goodwill and the Given Value of Goodwill

Rs 1,00,000 at 4 years purchase of Super Profit = Rs 3,20,000 - (4/10) * C

Rs 1,00,000 * 4 = Rs 3,20,000 - (4/10) * C

Rs 4,00,000 = Rs 3,20,000 - (4/10) * C

(4/10) * C = Rs 3,20,000 - Rs 4,00,000

(4/10) * C = - Rs 80,000

C = (- Rs 80,000) * (10/4)

C = - Rs 2,00,000

As capital employed cannot be negative, it means there is some mistake in the calculation.

Step 4: Check for the Mistake

Rs 80,000 - (1/10) * C = Rs 80,000 - 0.1C

Value of Goodwill = 4 * (Rs 80,000 - 0.1C)

Rs 1,00,000 at 4 years purchase of Super Profit = 4 * (Rs 80,000 - 0.1C)

Rs 4,00,000 = Rs 3,20,000 - 0.4C

0.4C = Rs 3,20,000 - Rs 4,00,000

0.4C = - Rs 80,000

C = - Rs 80,000 / 0.4

C = Rs 2,00,000

Step 5: Final Answer

The capital employed by the firm is Rs 2,00,000
Community Answer
Average profits of a firm during the last few years are rs 80,000 and ...
Attention Commerce Students!
To make sure you are not studying endlessly, EduRev has designed Commerce study material, with Structured Courses, Videos, & Test Series. Plus get personalized analysis, doubt solving and improvement plans to achieve a great score in Commerce.
Explore Courses for Commerce exam

Similar Commerce Doubts

Top Courses for Commerce

Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm?
Question Description
Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? for Commerce 2024 is part of Commerce preparation. The Question and answers have been prepared according to the Commerce exam syllabus. Information about Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? covers all topics & solutions for Commerce 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm?.
Solutions for Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? in English & in Hindi are available as part of our courses for Commerce. Download more important topics, notes, lectures and mock test series for Commerce Exam by signing up for free.
Here you can find the meaning of Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? defined & explained in the simplest way possible. Besides giving the explanation of Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm?, a detailed solution for Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? has been provided alongside types of Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? theory, EduRev gives you an ample number of questions to practice Average profits of a firm during the last few years are rs 80,000 and normal rate of return in a similar business is 10%. If the goodwill of the firm is rs 1,00,000 at 4years purchase of super profit, find the capital employed by the firm? tests, examples and also practice Commerce tests.
Explore Courses for Commerce exam

Top Courses for Commerce

Explore Courses
Signup for Free!
Signup to see your scores go up within 7 days! Learn & Practice with 1000+ FREE Notes, Videos & Tests.
10M+ students study on EduRev