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3.An existing firm had assets of Rs 4,00,000 including cash of Rs 15,000. The partner's capital accounts showed a balance of Rs 3,00,000 and reserves constituted the rest. If the normal rate of return is 12% and the goodwill of the firm is valued at Rs 50,000 at 2.5 year's purchase of super profits, what are the average profits of the firm?
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3.An existing firm had assets of Rs 4,00,000 including cash of Rs 15,0...
Calculation of Average Profits of the Firm


Given:


  • Assets of the firm = Rs 4,00,000 (including cash of Rs 15,000)

  • Partner's capital accounts balance = Rs 3,00,000

  • Reserves = Rest of the assets

  • Goodwill of the firm = Rs 50,000

  • Normal rate of return = 12%

  • Value of super profits = 2.5 years purchase of super profits



Step 1: Calculation of Super Profits


Super profits are the excess profits earned by a firm over and above the normal rate of return. To calculate super profits, we need to first calculate the normal profits of the firm. Normal profits are calculated as a percentage of the total assets of the firm.


Normal profits = 12% of Rs 4,00,000 = Rs 48,000


Super profits = Actual profits - Normal profits


Actual profits = (Partner's capital accounts balance + Reserves) - Assets (excluding cash)

Actual profits = (Rs 3,00,000 + Reserves) - (Rs 4,00,000 - Rs 15,000) = Rs 1,15,000 + Reserves


Super profits = Actual profits - Normal profits = (Rs 1,15,000 + Reserves) - Rs 48,000 = Rs 67,000 + Reserves


Step 2: Valuation of Goodwill


The goodwill of the firm is valued at 2.5 years purchase of super profits. This means that the value of goodwill is 2.5 times the amount of super profits.


Value of goodwill = 2.5 x Super profits = 2.5 x (Rs 67,000 + Reserves) = Rs 1,67,500 + 2.5 x Reserves


Step 3: Calculation of Average Profits


Average profits are calculated by adding the normal profits and the value of super profits and dividing the sum by the number of years for which the valuation is done. In this case, the valuation is done for 2.5 years.


Average profits = (Normal profits + Super profits) / Number of years

Average profits = (Rs 48,000 + Rs 67,000 + Reserves) / 2.5 = Rs 42,000 + 0.4 x Reserves


Therefore, the average profits of the firm are Rs 42,000 + 0.4 x Reserves.
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3.An existing firm had assets of Rs 4,00,000 including cash of Rs 15,000. The partner's capital accounts showed a balance of Rs 3,00,000 and reserves constituted the rest. If the normal rate of return is 12% and the goodwill of the firm is valued at Rs 50,000 at 2.5 year's purchase of super profits, what are the average profits of the firm?
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