If there is only replacement investment and no net investment, what will be the effect on capital stock?
Answer and explanation
Correct answer: Capital stock will generally remain constant
Replacement investment is just sufficient to offset depreciation. In this situation, Gross Investment = Depreciation, so Net Investment = Gross Investment − Depreciation = 0. There is neither a net addition nor a net loss of capital; therefore, the capital stock generally remains constant, assuming no other adjustments. It does not double, become negative or disappear.
Frequently asked questions
What is the correct answer to this question?
Capital stock will generally remain constant
Why is this the correct answer?
Replacement investment is just sufficient to offset depreciation. In this situation, Gross Investment = Depreciation, so Net Investment = Gross Investment − Depreciation = 0. There is neither a net addition nor a net loss of capital; therefore, the capital stock generally remains constant, assuming no other adjustments. It does not double, become negative or disappear.
Which subject and chapter does this question cover?
This is a Class 11 Accountancy question. Chapter: Depreciation, Provisions, and Reserves.
