Question

Scott used $4,000,000 from his savings account that paid an annual interest of 5% and a $60,000 loan at an annual interest rate of 5% to purchase a hardware store. After one year, Scott sold the business for $4,100,000. His accounting profits is: a. ​$100,000 b. ​$20,000 c. ​$300,000 d. ​$97,000

Answer 1

Answer: - $103,000

Explanation:

Cash from saving = $4,000,000

Interest on saving = 5%

Loan taken = $60,000

Interest on loan = 5%

Cost of sale = $4,100,000

From the above information,

Scott invested $4,000,000 if his saving which yields annual interest of 5% and took a $60,000 loan with an interest of 5% per annum.

Interest paid on loan = 0.05 × $60,000 = $3000

Business was sold for $4,100,000 a year later. Therefore, return on his investment

$(4,100,000 - 4,000,000 - 3000) = $97,000

However, if Scott had left the $4,000,000 invested in his saving account, he would have received

0.05 × 4,000,000 = $200,000 as interest.

Therefore, accounting profit :

$97,000 - $200,000 = - $103,000