Tanay and Ishaan were partners in a firm and their capitals were ₹4,00,000 and ₹1,00,000 respectively.
Normal rate of return = 15%
Goodwill of the firm = ₹1,00,000
Goodwill was calculated at two years' purchase of super profits.
Find the average profits of the firm.
Options:
Step 1: Calculate Total Capital Employed
= ₹4,00,000 + ₹1,00,000
= ₹5,00,000
Step 2: Calculate Normal Profit
Normal Profit
= Capital Employed × Normal Rate of Return
= ₹5,00,000 × 15%
= ₹75,000
Step 3: Calculate Super Profit
Goodwill = Super Profit × Number of Years' Purchase
₹1,00,000 = Super Profit × 2
Super Profit = ₹50,000
Step 4: Calculate Average Profit
Average Profit
= Normal Profit + Super Profit
= ₹75,000 + ₹50,000
= ₹1,25,000
Final Answer
Option (A) ₹1,25,000