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2 March, 20:04

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

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  1. 2 March, 20:12
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    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
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