Jason commenced with 135,000 cash. He acquired an established shop on 1 January 20X1. He agreed to
Question:
Jason commenced with £135,000 cash. He acquired an established shop on 1 January 20X1. He agreed to pay £130,000 for the fixed and current assets and the goodwill. The replacement cost of the shop premises was £100,000, stock £10,000 and debtors £4,000; the balance of the purchase price was for the goodwill. He paid legal costs of £5,000. No liabilities were taken over. Jason could have resold the business immediately for £135,000. Legal costs are to be expensed in 20X1.
Jason expected to draw £25,000 per year from the business for three years and to sell the shop at the end of 20X3 for £150,000.
At 31 December 20X1 the books showed the following tangible assets and liabilities:
Based on his experience of the first year’s trading, he revised his estimates and expected to draw £35,000 per year for three years and sell the shop for £175,000 on 31 December 20X3. Jason’s opportunity cost of capital was 20%.
Required:
(a) Calculate the following income figures for 20X1:
(i) Accounting income;
(ii) Income based on net realisable values;
(iii) Economic income ex ante;
(iv) Economic income ex post.
State any assumptions made.
(b) Evaluate each of the four income figures as indicators of performance in 20X1 and as a guide to decisions about thefuture.
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Financial Accounting and Reporting
ISBN: 978-0273744443
14th Edition
Authors: Barry Elliott, Jamie Elliott