Question

on december 1, jasmin ernst organized ernst consulting. on december 3, the owner contributed $82,890 in assets in exchange for its common stock to launch the business. on december 31, the company’s records show the following items and amounts. cash $ 15,140 cash dividends $ 830 accounts receivable 12,720 consulting revenue 12,720 office supplies 2,110 rent expense 2,380 office equipment 16,780 salaries expense 5,620 land 46,010 telephone expense 780 accounts payable 7,360 miscellaneous expenses 600 common stock 82,890

Answer 1

Accounting profit is the revenue minus explicit costs, but implicit costs should also be considered for overall profitability.

Step-by-step explanation:

Accounting profit is the amount of money a company earns after deducting explicit costs from its revenue. In this case, the accounting profit of Ernst Consulting is calculated by subtracting the explicit costs, such as rent expense, salaries expense, and miscellaneous expenses, from the consulting revenue. The resulting amount is $115,000. However, it's important to consider implicit costs as well, such as the opportunity cost of quitting a job and the salary that could have been earned. These implicit costs can impact the overall profitability of the business.

Answer 2

To determine if Eryn's legal practice would be profitable after considering implicit costs, we must subtract her current annual salary from the accounting profit. The explicit costs total $85,000, and subtracting this from her projected revenues of $200,000 gives an accounting profit of $115,000. Accounting for her $125,000 forgone salary, Eryn would experience an economic loss of $10,000.

Step-by-step explanation:

To calculate whether Eryn's legal practice would be profitable, we need to consider both explicit costs and implicit costs. The explicit costs are the direct, out-of-pocket expenses, such as office rental and staff salaries. Implicit costs are the opportunity costs of using resources that could have alternative uses; in this case, Eryn's forgone salary at her current job.

Calculating Explicit Costs

Office rental: $50,000
Law clerk's salary: $35,000
Total explicit costs: $85,000

Calculating Accounting Profit

Revenues: $200,000
Explicit costs: -$85,000
Accounting profit: $115,000

However, to get a complete picture of profitability, we must also subtract Eryn's current annual salary, which she would give up to run her practice, from the accounting profit to account for the implicit costs. Therefore, the calculation for Eryn's economic profit would be $115,000 (accounting profit) - $125,000 (implicit cost) which results in an economic loss of $10,000.