The facts are the same as illustration 14.1.
Required: Compute the profit based on real financial capital maintenance concept.
See a suggested solution to practice activity 14.2 here.
Suggested solution to practice activity 14.2
Note: Adjustment is made to the opening equity using the general inflation rate. The opening equity is adjusted to maintain its purchasing power.
Under real financial capital maintenance, No More Inflation Ltd has to ensure that it had the same purchasing power as at 31 December 2018 as it had at the beginning of the period (1 January 2018). General inflation was 5% and No More Inflation Ltd needed ₦26,250 as at 31 December 2018 to have the same purchasing power equivalent to the purchasing power at the beginning of the period (1 January 2018). In order to maintain opening equity in real terms No More Inflation Ltd has to transfer ₦1,250 from its profit or loss account to inflation reserve account. Profit for the year will now be ₦3,750.
If No More Inflation Ltd paid out ₦3,750 to shareholders as dividend, it will be left with N26,250. This is not enough to buy the same ladies suit that it had in its opening inventory at the opening date of the period (1 January 2018). The specific inflation rate on Ladies’ suits is 10% and No More Inflation Ltd will require ₦27,500 (₦25,000+ ₦2,500) as at 31 December 2018 to purchase Ladies’ suits. No More Inflation Ltd will not have the same operating capacity as at 31 December 2018 as it had as at 1 January 2018.
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