Question

At the beginning of 20X5, its first year of business, Marsals Ltd invested $64,000 in inventory and $300,000 in equipment. Total sales were $160,000. of the initial inventory purchases, $25,000 remained $300,000 in equipment. Total sales were $160,000. Of the initial inventory purchases, $25,000 remained in inventory at end of the period Marsalis depreciated the equipment by 20% straight-line, taking a full year's depreciation in 20X5.

The replacement cost of the inventory, both that sold and remaining in year-end inventory, had decreased by 10% by the end of the year: the replacement cost of the equipment, however, had increased by 3% over the year.

Determine the net income (using only the cost indicated above each of the following assumptions.

1. Nominal dollaer capital maintenance

2. Phycal capital maintenance.

Answer 1

1. Nominal dollar capital maintenance

Sales	160,000
Less: Inventory cost (64,000-25,000)	(39,000)
Less: Depreciation (20% of 300,000)	(60,000)
Profit	61,000

2. Physical Capital Maintenance

Sales	160,000
Less: Inventory cost (64,000-25,000) X (1-0.1)	(35,100)
Less: Depreciation (20% of 300,000) X (1.03)	(61,800)
Less: Decrease in cost of unsold inventory (10% of 25,000)	(2,500)
Add: Increase in value of equipment (3% of 300,000)	9,000
Profit	69,600