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how much of the accounting gain computed in a could be attributed to inflation and h 614241

The effects of inflation on reported profits

On January 1, 2011, you purchased a piece of property for $10,000. On December 31 of that year, you sold the property for $20,000. Assume that the general rate of inflation for 2011 was 10 percent.


a. According to generally accepted accounting principles, how much gain would be recorded in the income statement due to the sale of the property?

b. The $10,000 you used to purchase the property on January 1 could have been used to purchase any number of goods and services on January 1. Would the $20,000 you received at the end of the period enable you to purchase twice as many goods and services? Why or why not?

c. How much of the accounting gain computed in (a) could be attributed to inflation, and how much could be attributed to the fact that the property rose in value? Do generally accepted accounting principles make such a distinction? Why or why not?

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