Question

At the end of the year, ABC Company's net assets were $60,000. Net income calculated by using the capital maintenance concept was $20,000. During the year, additional common stock was issued for $14,000, and $8,000 of dividends were paid. The net assets at the beginning of the year were

a.$31,000.

b.$20,000.

c.$34,000.

d.$25,000.

Which of the following statements regarding the capital maintenance concept is not true?

a.The capital maintenance concept implies net income for the period is the amount of money that can be distributed to shareholders as a return on capital, without being a return of capital.

b.Under the capital maintenance concept, income would be computed as the difference between the beginning and ending net assets, after any adjustments for additional investments or distributions to shareholders.

c.Under the capital maintenance concept, lifetime income would be computed as the total amount of cash distributed to shareholders minus the total amount of capital invested by shareholders.

d.The capital maintenance concept asserts that shareholders' capital must be maintained and therefore income is measured as the decrease in capital.

Answer 1

According to Financial Capital Maintenance Concept, the company earns profit only when if its amount of net assets at the end of the period is greater than its beginning net assets.This excludes any contribution from or distribution to the owners.

Therefore Net asset at the beginning of the year would be

Closing Net assets-addition in common stock -net profit+dividend paid= Opening net assets

60000-14000-20000+8000=34000

a is true because dividend a kind of return on capital although from the original investment, therefore not return of capital

b is true.According to Financial Capital Maintenance Concept, the company earns profit only when if its amount of net assets at the end of the period is greater than its beginning net assets.This excludes any contribution from or distribution to the owners.

c is untrue because lifetime income would also include the profit that is not distributed as dividend.

d is true because the capital maintenance implies that net income can be only be distributed as a return on capital and not as return of capital.