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

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 to the business before any drawings by Jason He estimated that the net realisable values were: Shop premises Stock Debtors Cash Creditors 100,000 5,500 5,200 40,000 5,000 85,000 20,000 5,200 40,000 5,000