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ACCA Applied Knowledge · Financial Accounting · Key principles and concepts of accounting

Farrow Co started the year with net assets of $400,000. During the year the owners introduced $30,000 of new capital and withdrew $20,000 as dividends. Closing net assets were $470,000. The cost of replacing the company's operating capacity rose by $25,000 over the year, which is the amount needed to maintain physical capital. What profit is reported under physical capital maintenance?

Profit is $35,000. The net asset increase of $70,000 is adjusted for capital introduced of $30,000 and drawings of $20,000, giving $60,000 on a money capital basis. Physical capital maintenance then deducts the $25,000 rise in replacement cost of operating capacity, leaving $35,000.

  1. A$35,000Correct
  2. B$45,000
  3. C$60,000
  4. D$85,000

Explanation

Total increase in net assets is 470,000 - 400,000 = $70,000. Adjust for owner transactions: 70,000 - 30,000 introduced + 20,000 withdrawn = $60,000 profit under money financial capital maintenance. Physical capital maintenance also deducts the $25,000 capital maintenance adjustment: 60,000 - 25,000 = $35,000. $60,000 ignores the adjustment.

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