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Hello, I came across this question in the Kaplan text and was unsure of how to get the answer.
Could you please help me out?Ross Co made a profit of $350,000 for 20×9 based on historical cost accounting principles. Ross Co had opening capital of $1,000,000. Specific price indices increase during the year by 20% and general price indices by 5%.
How much profit should Ross Co record for 20×9 under three different capital maintenance concepts?Option A – $350,000 under real financial capital maintenance, $300,000 under money financial capital maintenance, and $150,000 under physical capital maintenance.
Option B – $350,000 under money financial capital maintenance, $150,000 under real financial capital maintenance, and $300,000 under physical capital maintenance.
Option C – $350,000 under money financial capital maintenance, $300,000 under real financial capital maintenance, and $150,000 under physical capital maintenance.
Option D – $150,000 under money financial capital maintenance, $350,000 under real financial capital maintenance, and $300,000 under physical capital maintenance.The answer according to the text is Option C. But I don’t really get how they arrived at those amounts.
Hi,
Real capital maintenance, we adjust for the impact of general inflation (5%). Physical capital maintenance, we adjust for specific inflation (20%).
To account for the inflation figures, we need to remove the impact of inflation using the 5%/20$ figures. Have a go and see if you can then figure it out.
Let me know how you get on and I can help further if required.
Thanks,
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Hello, sorry I still don’t understand it. Do we use the 5% and 20% on the opening capital?
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