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 Biotechs books on January 1, 2009 immediately after receiving the $1 million down payment.
b.
Compute the present value of the receivable on Biotechs books on December 31, 2009.
c.
Compute the present value of the receivable on Biotechs 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 firms 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.