Problem 1
J&J Enterprises is formed on December 31, 2000. At that point it has
one asset costing $2,487. The asset has a three-year life with no
salvage value and is expected to generate cash flows of $1,000 on
December 31, in the years 2001, 2002, and 2003. Actual results are the
same as planned. Depreciation is the firm?s only expense. All income
is to be distributed as dividends on the three dates mentioned. Other
information includes:
- The price index stands at 100 on December 31, 2000. It goes up to 104 and
108 on January 1, 2002 and 2003 respectively.
- Net realizable value of the asset on December 31 in the years 2001, 2002,
and 2003 is $1,500, $600, and $0, respectively.
- The firm?s asset IRR is 10%
Your Task is to Produce:
Income statements for the years 2001, 2002, and 2003 under:
1. Historical costing
2. General price-level adjustment
3. Exit valuation
4. Replacement cost
5. Discounted cash flows
Based on the information you have now created briefly address the
following questions:
- How does the information you produced meet the theoretical notion
of "usefulness?" (1 to 2 paragraphs)
- Is the construct of utility a scientific or cultural notion?
(1 to 2 Paragraphs)
Problem 2
Examine the following document:
Revenues 1,000,000
Operating Expenses
- Cost of goods sold 400,000
- Depreciation 100,000
- Salaries and wages 200,000
Bond interest (8% debentures sold
at maturity value of $1,000,000) 80,000
Dividentds declared on 6% preferred
stock (par value $500,000) 30,000
Dividentds declared of $5 per share
on common stock (20,000 shares outstanding) 100,000
Based on this information you are to complete the following tasks:
1. Determine the income under each of the following equity theories:
? Proprietary theory
? Entity theory (orthodox view)
? Entity theory (unorthodox view)
? Residual theory
2. Would any of your answers change if the preferred stock is convertible
at any time at the ratio of 2 preferred shares for 1 share of common stock? |
