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Historical Cost vs Fair Value A company raising $300,000 in cash $150,000 from issuing equity Answer

Historical Cost vs Fair Value A company raising $300,000 in cash $150,000 from issuing equity Answer

Historical Cost vs Fair Value A company raising $300,000 in cash $150,000 from issuing equity Answer


1. Historical Cost vs. Fair Value Instruction :

a] Please prepare the Year 1 and Year 2 (closing) income statement and balance sheet

b] Please show your calculation to support each amount

Information : A company raising $300,000 in cash; $150,000 from issuing equity and $150,000 from issuing long term debt with 8% discount rate. Company uses $300,000 rising to invest to a commercial property. It rents out for $25,000 per year. At the end of Year 1, the company is still holding the commercial property, which is valued at 375,000. Also, the market value of the long-term security has raise to $160,000. Now, assume that during Year 2, the company earns rental income of $30,000, the commercial property is valued at $350,000 at year ended, and the market value of the long-term investment has decreased to $120,000. Assume the commercial property’s useful life is 50 years and its salvage value is $100,000 at the end of that period. Also assume that rental income (interest on long-term investment) is received (paid) in cash on the last day of the year.

2. Converting Operating Leases to Capital Leases Company will convert the operating lease to capital lease. Please see information below to determine the present value of projected operating lease payment and lease amortization.

a] Estimate the length of the remaining period beyond 3 year of operating lease

b]Beginning year of lease balance of 2004 is $4,500 with 4.5% as a discount rate to determining the present value.

c] The lease payments for 2004 – 2006 is $400 in each year, thereafter is $4,000. The estimated payments after 2006 are assumed equal to the 2006 payment and continue for the estimated length of the remaining period.

d] Please set up the table as follow. please Exhibit 3.7 on page 152 as reference. e] Please show your calculation.

3. Postretirement Benefit Define benefits plan : A single employee who is expected to retire in 10 years and is paid an annual fixed pension of $15,000 for 8 years after retirement. The discount interest rate is assumed to be 6% per year. We also assume the employer exactly funds the plan to contribute the plan of $5,000 per annum. These plans involve current investment by the employer for future payment of benefits to the employee.

Instructions: A] Please calculate the eight years Present value, discount factor, employer liability (pension obligation), Pension obligation, Annum Employer contribution (Plan asset), Interest rate, earned interest, Net obligation (fund status as liability). Please use the table that I handed out in class as reference.

4. Company A (Lessor) leases an equipment to Company B (Lessee) for 8 years beginning Jan 1. Year 1at an annual rental of $8,000. Company A (Lessor) implicit borrowing of 10% is known to Company B (Lessee). The asset’s economic life is 10 Years and future value of the asset at the inception of the lease is $50,000

Instructions: a] please use 75% and 90% technique to determine the qualification as capital leases.

b] please show you calculation and interpretation.


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Historical Cost vs Fair Value

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