event that occurs when holding monetary item during a period of inflation or deflation. A purchasing power loss occurs on holding monetary assets during inflation because of the decline in purchasing power of the dollar. A purchasing power gain arises, from a borrowing company's standpoint, on monetary liabilities in an inflationary environment, because the company will be paying back in cheaper dollars. Purchasing power gains or losses are shown in the price-level adjusted income statement. Assume that on 1/1/20X1 net monetary assets are $55,000, and during 20X1 the increase in net monetary assets is $6000. The relevant Consumer Price Indices are: 1/1/20X1 212.9, average for 20X1 220.9, and 12/31/20X1 243.5. The computation of the purchasing power loss for 20X1 follows:
| Historical Cost | Conversion Factor | Average 20X1 Dollars | ||
| 1/1/20X1 | $55,000 | × | 220.9 212.9 | $57,067 |
| Increase in monetary items | 6,000 | × | 220.9 | 6,000 |
| 220.9 | ||||
| $63,067 | ||||
| 12/31/20X1 | $61,000 | × | 220.9 243.5 | $55,338 |
| Purchasing Power Loss | $ 7,729 |
