The traditional view of the production process is that capital is subject to
a. constant returns.
b. increasing returns.
c. diminishing returns.
d. diminishing returns for low levels of capital, and increasing returns for high levels of capital

The correct answer is letter "C": diminishing returns.

Explanation:

The traditional view of the production process establishes that the extra production generated by an additional unit of capital drops as the inventory of capital increases. Other production determinants, including human capital, natural resources, and technology keep their same levels.

Question Completion:

a. Determine the amount of the building that would be reported in the balance sheet at the end of Years 1 - 5.

b. Determine the amount that would be recognized in the income statement  related to the building, in Years 1 - 5.

Hol Company

a.   Balance Sheet        Year 1       Year 2      Year 3      Year 4      Year 5

Building (Cost or revalued

amount)            $1,000,000 $1,000,000 $970,000 $970,000 $950,000

b. Income Statement    Year 1       Year 2      Year 3      Year 4      Year 5

Depreciation Expense $25,000   $25,000  $25,526  $25,526  $26,389

Revaluation Loss            $0             $0          $30,000   $0           $20,000

Explanation:

a) Data and Calculations:

Year 1 Cost of building = $1,000,000

Year 3 Revalued building = $970,000

Year 5 Revalued building = $950,000

b) IAS 16 allows the use of the Cost model and the Revaluation model.