Transaction or Event
Cash Contributed by Owners
Purchase of Machine for Cash
Recognition of Rent Revenue
Recognition of Operating Expenses
Recognition of Depreciation
Sale of Machine
Totals
Cash
Equipment
Common
Stock
1,00,000
(1,00,000)
1,25,000
(30,000)
(80,000)
2,000
$ 97,000
$ (80,000)
$ -
(a)
common stocks
(b)
bonds
(c)
real estate
(d)
timber investments
(e)
private equity funds
(f)
illiquid asset-backed securities
Level 1
Level 1
Level 2
Level 3
Level 2
Level 3
Chapter 2
2.4
Income Flows Versus Cash Flows
The text states, "Over sufficiently long time periods, net income equals cash inflows min
flows with owners." Demonstrate the accuracy of this statement in the following scenari
each to form a new business. The owners used the amounts contributed to purchase a m
estimated that the useful life of the machine was five years and the salvage value was $2
to a customer for an annual rental of $25,000 a year for five years. Annual cash operatin
other items totaled $6,000 annually. At the end of the fifth year, the owners sold the eq
$20,000 salvage value initially estimated. (Hint: Compute the total net income and the to
with owners for the five-year period as a whole. If it doesn't impact Net Income, don't in
Use drop-down to select
answers in yellow cells
2.8
Fair Value Measurements
The text discusses inputs managers might use to determine fair values of assets and liabi
classifications of assets identified in SFAS No. 157. Suppose a major university endowme
assets, including (a) common stocks; (b) bonds; (c) real estate; (d) timber investments, w
timber, private equity funds, and illiquid asset-backed securities. Consider how the portf
values of each of those classes of assets, and characterize the inputs you identify as Leve
2.12
Effect of Valuation Method for Nonmonetary Asset on Balance Sheet and Income State
Cash
Land
Gain on land
Loss on land
2016
2017
Dr
Cr
Dr
Cr
1,50,000
1,00,000
30,000
30,000
50,000
Cash
Land
Gain on sale of land
Unrealized gain - OCI
Unrealized loss - OCI
2016
2017
Dr
Cr
Dr
Cr
1,50,000
1,00,000
30,000
30,000
50,000
Assume Walmart acquires a tract of land on January 1, 2016, for $100,000 cash. On Dece
value of the land is $150,000. On December 31, 2017, the current market value of the la
land on December 31, 2018, for $180,000 cash.
REQUIRED
Ignore income taxes. Indicate the effect on the balance sheet and income statement of t
2017, and 2018 under each of the following valuation methods (Parts a-c).
a. Valuation of the land at acquisition cost until sale of the land (Approach 1)
Land would be valued at acquisition cost of $100,000 initially, and would not change thro
building is sold for $180,000, Walmart would recognize a gain of $80,000 on the income
b. Valuation of the land at current market value and including market value changes ea
1,50,000 1,50,000 30,000 30,000
c. Valuation of the land at current market value but including unrealized gains and loss
comprehensive income until sale of the land (Approach 3)
1,50,000 1,50,000 30,000 30,000
d. Why is retained earnings on December 31, 2018, equal to $80,000 in all three cases
amounts of net income each year?
Net income over sufficiently long time periods equals cash inflows minus cash outflows.
for $100,000 and sold it for $180,000 in 2018. Thus, the total effect on net income throuc
the value of the land bought and sold is $80,000. The three different methods of asset
va recognize this $80,000 in different patterns over time, but the total is the same.
2.16
Deferred Tax Assets
Components of the deferred tax asset of Biosante Pharmaceuticals, Inc., are shown in Ex
$6,25,42,000
$2,36,09,594
The company has recorded a valuation allowance for the deferred tax asset equal to thec
asset. This means that the company believes that it has "a low likelihood" of being usedc
i implies that management is not optimistic about the company’s ability to generatec
futur
The income tax expense entry decreased net income; the valuation allowance entry decr
deferred tax liabilities.
REQUIRED
a. At the end of 2008, the largest deferred tax asset is for net operating loss carryforwar
also referred to as tax loss carryforwards, are amounts reported as taxable losses on tax
generally do not "pay" corporations for incurring losses, companies are allowed to
"carry years to offset taxable income. These future tax benefits give rise to deferred tax
assets. dollar amount of the company's net operating loss carryforwards?
What is the dollar amount of the deferred tax asset for the net operating loss carryforwa
b. Biosante has gross deferred tax assets of $28,946,363. However, the net deferred tax
c. The valuation allowance for the deferred tax asset increased from $21,818,084 to
$28 How did this change affect the company's net income?
us cash outflows, other than cash
o: Two friends contributed $50,000
achine for $100,000 cash. They
0,000. They rented out the machine
g costs for insurance, taxes, and
uipment for $22,000, instead of the
tal cash flows other than cash flows
clude it.)
Net
Income
1,00,000
(1,00,000)
1,25,000
(30,000)
(80,000)
2,000
$ 17,000
lities and identifies different
nt has investments in a wide array of
hich receive cash flows from sales of
olio manager would estimate the fair
l 1, Level 2, or Level 3.
ment
ugh 2018. In 2018, when the
statement.
Walmart acquired the land in 2016
gh the realization of the increase in
luation and income measurement
mber 31, 2016, the current market
nd is $120,000. The firm sells the
he preceding information for 2016,
ch year in net income (Approach 2)
2018
Dr
Cr
1,80,000
1,00,000
80,000
1,80,000 1,80,000
es in accumulated other
2018
Dr
Cr
1,80,000
1,20,000
60,000
1,80,000 1,80,000
despite the reporting of different
hibit 2.10. The company had no
entire amount of the deferred tax
n the current or any future year. This
e taxable income.
eased the deferred tax asset.
ds. (Net operating loss carryforwards,
filings. Because the tax authorities
forward" taxable losses to future
) As of the end of 2008, what is the
rds?
assets balance is zero. Explain.
,946,363 between 2007 and 2008.
