Final answer:
To calculate a company's accounting profit, service and interest costs are subtracted from its revenue. These are considered explicit costs, which are necessary expenses that reduce overall profit. The costs incurred are subtracted from the company's revenue, not added or considered tax-deductible for the purpose of determining profit.
Step-by-step explanation:
To determine the effect of costs on a company's finances, it is necessary to understand the different types of costs and how they are treated in financial statements. In the case of Barrel Corporation, which had service and interest costs of $50,000, these costs are considered explicit costs. These are the direct, out-of-pocket costs for running a business and they affect the calculation of accounting profit.
Step 1. The first step in understanding the impact of these costs is to account for all explicit costs which, in a hypothetical example, might include things like office rentals and salaries. Fred's example shows an office rental cost of $50,000 and a law clerk's salary of $35,000, totaling $85,000 in explicit costs.
Step 2. After identifying the explicit costs, you calculate the accounting profit by subtracting the explicit costs from the revenues. For instance, if revenues were $200,000 and explicit costs $85,000, the accounting profit would be $115,000.
In summary, service and interest costs such as in the case presented for Barrel Corporation are generally subtracted from the company's revenue when determining its accounting profit. This is because the costs incurred from running the business (e.g., paying for services and interest on debts) are necessary expenses and thus reduce the overall profit. So, the correct answer is D) The costs incurred are subtracted from the company's revenue.