On the 1 June,Hazel Ltd commenced business with $10,000 cash and immediately purchased 2000 sprockets for $5 each.On the 30 June it sold all the units for $10.The current cost of the units on 30 June was $5.50 each.Under the physical capital perspective,what would be the capital maintenance adjustment for Hazel Ltd for June?
A)$1000
B)$2000
C)$9000
D)$10,000

Question

Quizplus · Accepted Answer

Under the physical capital perspective, capital maintenance requires replacing the physical productive capacity used up in the production process. In this case, the cost of the sprockets sold is $11,000 ($5.50 each x 2000 units). Since the selling price of these units is only $10,000, Hazel Ltd has not fully recovered the cost of the sprockets it sold. To maintain its capital, Hazel Ltd needs to make a capital maintenance adjustment of $1000 ($11,000 - $10,000).

On the 1 June,Hazel Ltd Commenced Business with $10,000 Cash