1 markMCQSection A

The books of Mehul and Barkha showed that their capital employed on 31st March, 2025 was Rs. 6,00,000. If the normal profits are Rs. 60,000 and super profits are Rs. 20,000, then the normal rate of return is :

Q: The books of Mehul and Barkha showed that their capital employed on 31st March, 2025 was Rs. 6,00,000. If the normal profits are Rs. 60,000 and super profits are Rs. 20,000, then the normal rate of return is :

**Correct option: (D) 10%.** $\text{Normal Rate of Return} = (\text{Normal Profit} \div \text{Capital Employed}) \times 100 = (\text{Rs. }60,000 \div \text{Rs. }6,00,000) \times 100$ = **10%**.

Reconstitution of a Partnership Firm: Admission of a Partner (Goodwill Valuation)

Valuation of Goodwill — Super Profit Method

Options

(A)6%

(B)15%

(D)10%

Official Answer

Correct option: (D) 10%.

$\text{Normal Rate of Return} = (\text{Normal Profit} \div \text{Capital Employed}) \times 100 = (\text{Rs. }60,000 \div \text{Rs. }6,00,000) \times 100$ = 10%.

normal rate of returncapital employednormal profitsuper profitgoodwill valuationsuper profit method

Marking Scheme

11 mark: for correctly selecting option (D) 10% with the formula $\text{Normal Profit} \div \text{Capital Employed} \times 100$ .

Hint

$\text{Normal Rate of Return} = \text{Normal Profit} \div \text{Capital Employed} \times 100$ ; ignore the super profit figure for this calculation.

Quick Oral Answer

Normal Rate of Return is the return that similar businesses normally earn on capital employed; here it equals Normal Profit divided by Capital Employed, i.e. $\text{Rs. }60,000/\text{Rs. }6,00,000 = 10\%$ .

Analysis & Explanation

Concept: Normal Rate of Return is the rate of return that similar firms in the same industry normally earn on their capital employed; it is used to compute Normal Profit under the Super Profit and Capitalisation methods of goodwill valuation.

Working:

Capital Employed = Rs. 6,00,000
Normal Profit = Rs. 60,000
$\text{Normal Rate of Return} = \text{Normal Profit} \div \text{Capital Employed} \times 100 = 60,000/6,00,000 \times 100 = 10\%$

Why other options are wrong:

(A) 6% and (B) 15% do not match the ratio of Normal Profit to Capital Employed.
(C) 30% would apply only if Normal Profit were Rs. 1,80,000, which is not given.

Note on Super Profit: Super Profit (Rs. 20,000) = Average Profit − Normal Profit, and is not required to calculate the Normal Rate of Return here — it is extra/distractor information testing whether students confuse the two profit figures with capital employed.

Common Mistakes

1Using super profit instead of normal profit in the formula, leading to an incorrect rate of 3.33%.
2Forgetting to multiply by 100 and expressing the answer as a decimal fraction instead of a percentage.
3Confusing Normal Rate of Return with Average Rate of Return, which is based on average profit, not normal profit.

Interesting Facts

The Super Profit method of goodwill valuation was popularised because it directly measures a firm's 'extra earning capacity' over what is normal for the industry, making goodwill valuation more objective.

CBSE frequently tests Normal Rate of Return as a 1-mark MCQ because it is foundational to both the Super Profit and Capitalisation of Super Profit methods of goodwill valuation.

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Frequently Asked Questions

What is the formula for Normal Rate of Return?

$\text{Normal Rate of Return} = (\text{Normal Profit} \div \text{Capital Employed}) \times 100$ . It represents the rate of return that similar firms in the same industry normally earn on their capital employed, and is used as a benchmark when valuing goodwill under the Super Profit and Capitalisation methods.

Is Super Profit needed to calculate Normal Rate of Return?

No. Normal Rate of Return depends only on Normal Profit and Capital Employed. Super Profit (Average Profit minus Normal Profit) is a separate figure used later to compute goodwill, not to derive the Normal Rate of Return.