1. There are three valuation methods that
reflect historical values: acquisition cost, adjusted acquisition cost, and
present value of cash flows using historical interest rates. For each of three
methods discuss what the valuation represents and provide an example of a
balance sheet item that is valued using the method. In addition, for each of
the three methods valuation methods explain its advantages and disadvantages.
2. The analytical framework used to evaluate
transactions is reproduced below:
Cash
+
Non-Cash
Assets
=
Liabilities
+
Contributed
Capital
+
Accumulated Other
Comprehensive
Income
+
Retained
Earnings
Using this analytical
framework indicate the effect of each of the following transactions for Wisco
Corporation:
1.
Wisco sold
merchandise for $225,000 on account which cost $170,000 to manufacture.
2.
Wisco purchased for
cash $110,000 of raw material inventory.
3.
The company paid
$25,000 in advance for an advertising campaign that would be aired next year.
4.
Wisco paid its
employees $15,000 for the month.
5.
The company
purchased $7,000 of supplies on account.
6.
Wisco issued
$25,000 of long-term debt.
7.
The company used
$10,000 of excess cash to purchase marketable securities.
8.
Wisco purchased a
machine for $22,000 in cash.
9.
At the end of the
year Wisco paid dividends of $5,000.
10.
At the end of the
year the marketable securities that Wisco purchased in transaction 7 were now
worth $11,500.
11.
Depreciation for
the period was $1,500.
3. The analytical framework used to evaluate
transactions is reproduced below:
Cash
+
Non-Cash
Assets
=
Liabilities
+
Contributed
Capital
+
Accumulated Other
Comprehensive
Income
+
Retained
Earnings
Using this analytical
framework indicate the effect of each of the following transactions for Staples
Corporation:
1.
Staples recorded
cash sales of $25,000. The merchandise had cost $19,000 to manufacture.
2.
Staples purchased
$8,500 of raw material inventory on account.
3.
The company paid
$2,500 for property insurance for the next 12 months.
4.
Staples paid its
employees $5,000 for the month.
5.
The company
purchased $1,000 of supplies on account.
6.
Staples issued
$25,000 of long-term debt.
7.
The company used
$10,000 of excess cash to purchase marketable securities.
8.
Staples purchased a
machine for $16,000 using $8,000 cash with the balance on account.
9.
Staples paid $2,500
for interest expense on the long-term debt.
10.
At the end of the
year the marketable securities that Staples purchased in transaction 7 were
now worth $14,500.
11.
Depreciation for
the period was $1,500.
12.
Staples examined
the equipment and determined that its fair value was $10,000.
4. The following problem requires present value
information:
Biotech sold a patent
on a new blood analyzer to Pharma. The sales agreement which was signed on
January 1, 2009 requires Pharma to pay Biotech $1 million immediately. In
addition, Pharma is required to pay $700,000 each December 31 for 20 years
starting with December 31, 2009. Pharma and Biotech judge that a 10 percent is
an appropriate interest rate for this arrangement.
a.
Compute the present
value of the receivable on Biotechâs books on January 1, 2009 immediately
after receiving the $1 million down payment.
b.
Compute the present
value of the receivable on Biotechâs books on December 31, 2009.
c.
Compute the present
value of the receivable on Biotechâs books on December 31, 2010.
5. Jurgen Company’s income tax return shows
income taxes for 2010 of $75,000 (that is, $75,000 is owed for 2010). For
financial reporting, the firm reports deferred tax assets of $67,900 at the
beginning of 2010 and $63,600 at the end of 2010. It reports deferred tax
liabilities of $53,600 at the beginning of 2010 and $59,400 at the end of 2010.
Required:
a. Compute the amount
of income tax expense for 2010.
b. Assume for this
part that the firmâs deferred tax assets are as stated above for 2010 but that
its deferred tax liabilities were $83,500 at the beginning of 2010 and $72,100
at the end of 2010.
Compute the amount of income tax expense for 2010.
c. Explain
contextually why income tax expense is higher than taxes owed in Part a and
lower than taxes owed in Part b.
