The list price of a new van was $30,000 at a local car dealership. However, a customer convinced the dealer to sell the van for $25,000 (the van had cost the dealer $20,000 one year earlier). The van would cost the dealer $24,000 today. Inflation is 5% per year. The amount of profit that would be recognized by the dealer as a result of the sale using the physical capital maintenance approach is:
A) $1,000
B) $2,500
C) $5,000
D) $6,000

Question

Quizplus · Accepted Answer

The physical capital maintenance approach considers the cost to replace the asset. The dealer sold the van for $25,000, and it would cost $24,000 to replace it today. Therefore, the profit recognized is $25,000 - $24,000 = $1,000.

The List Price of a New Van Was $30,000 at a Local