Jason commenced with 135,000 cash. He acquired an established shop on 1 January 20X1. He agreed to pay 130,000 for the fixed and current assets and the goodwill. The replacement cost of the shop premises was 100,000, stock 10,000 and debtors 4,000; the balance of the purchase price was for the goodwill. He paid legal costs of 5,000. No liabilities were taken over. Jason could have resold the business immediately for 135,000. Legal costs are to be expensed in 20X1.

Jason expected to draw 25,000 per year from the business for three years and to sell the shop at the end of 20X3 for 150,000.

At 31 December 20X1 the books showed the following tangible assets and liabilities:

Based on his experience of the first years trading, he revised his estimates and expected to draw 35,000 per year for three years and sell the shop for 175,000 on 31 December 20X3. Jasons opportunity cost of capital was 20%.

Required:

(a) Calculate the following income figures for 20X1:

(i) accounting income;

(ii) income based on net realisable values;

(iii) economic income ex ante; (iv) economic income ex post.

State any assumptions made.

(b) Evaluate each of the four income figures as indicators of performance in 20X1 and as a guide to decision about future

Cost to the business before any drawings He estimated that the net realisable by Jason: values were: Cost to the business before any drawings He estimated that the net realisable by Jason: values were