Question

Milton purchases land and a factory building for his business for $300,000 with $100,000 being allocated to the land. During the first year, Milton deducts cost recovery of $4,922. Milton's adjusted basis for the building at the end of the first year is $195,078 ($200,000 - $4,922). ( true or false)

Answer 1

The firm's accounting profit was $115,000. The economic profit was $55,000.

Step-by-step explanation:

Accounting Profit:

To calculate the accounting profit, we subtract the explicit costs from the revenue.

In this case, the revenue is $200,000 and the explicit costs are $85,000.

Therefore, the accounting profit is $115,000.

Economic Profit:

To calculate the economic profit, we need to consider the opportunity cost of using the firm's own land instead of renting it.

The opportunity cost is the $30,000 annual rent.

Since the firm owns the land, this cost is not included in the explicit costs.

Therefore, the economic profit would be $85,000 (accounting profit) minus $30,000 (opportunity cost of land).

This results in an economic profit of $55,000.

Thus, accounting profit was $115,000 and the economic profit was $55,000.