Palomar Paper Products purchased land in 1981 for $15,000 cash. The company has held the land since that time. In 1996 Palomar purchased another tract of land for $15,000 cash. Assume that prices in general increased by 60 percent from 1981 to 1996. REQUIRED:

a. Assuming that Palomar made only these two land purchases, what dollar amount would appear in the Land account on Palomar’s balance sheet as of December 31, 1996?

b. Palomar used $15,000 cash to make each land purchase. Would $15,000 in 1981 buy the same amount of goods and services as $15,000 in 1996? If not, how much more or less, and why?

c. Explain how one could adjust the dollar amount reported in the Land account as of December 31, 1996 if the stable dollar assumption were dropped.