A+ Answers of the following Questions

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1. On January 1, 2008, Capitech Corporation acquired Logirun, Inc. as a long-term investment for $250,000 (a 30 percent common stock interest in Logirun). On that date, Logirun had net assets with a book value and current market value of $800,000. During 2008, Logirun reported net income of $90,000 and declared and paid cash dividends of $20,000. What is the maximum amount of income that Capitech should report from this investment for 2008?

A. $6,000

B. $21,000

C. $26,750

D. $27,000

For each situation listed in questions 2–3, indicate by letter the appropriate accounting assumption being discussed.

2. When preparing the financial statements for MacNeil & Sons, the accountant included certain personal assets of MacNeil and his sons in preparing the statements.

A. Stable monetary units

B. Specific economic entity

C. Going concern

D. Arm’s-length transactions

3. The operations of Uintah Savings and Loan are being evaluated by the federal government.

During their investigations, government officials have determined that numerous loans made by top management were unwise and have seriously endangered the future of the savings and loan.

A. Stable monetary units

B. Specific economic entity

C. Going concern

D. Arm’s-length transactions

Answers

1. D. $27,000

2. B. Specific economic entity

3. C. Going concern

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1. On October 1, Dennis Company purchased $200,000 face value 12 percent bonds for 98 plus accrued interest and brokerage fees and classified them as held-to-maturity securities. Interest is paid semiannually on January 1 and July 1. Brokerage fees for this transaction were $700.

At what amount should this acquisition of bonds be recorded?

A. $196,000

B. $196,700

C. $202,000

D. $202,700

2. All payments out of petty cash are debited to miscellaneous expense.

A. Materiality

B. Representational faithfulness

C. Economic entity

D. Historical cost

3. Periodic payments of $1,500 per month for services of H. Hay, who is the sole proprietor of the company, are reported as withdrawals.

A. Materiality

B. Representational faithfulness

C. Economic entity

D. Historical cost

Answers

1. B. $196,700

2. A. Materiality

3. C. Economic entity

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1. Investments in equity securities are initially recorded at cost.

A. Materiality

B. Representational faithfulness

C. Economic entity

D. Historical cost

2. A note describing the company’s possible liability in a lawsuit is included with the financial statements even though no formal liability exists at the balance sheet date.

A. Materiality

B. Representational faithfulness

C. Economic entity

D. Historical cost

3. In March of 2007, Moon Corp. bought 45,000 shares of McMahon Corp.’s listed stock for

$450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2007. Moon changed the classification of these shares to trading securities in June of 2008 when the market value of this investment in McMahon’s stock had risen to $345,000. How much should Moon include as a loss on transfer of securities in its determination of net income for 2008?

A. $0

B. $45,000

C. $105,000

D. $150,000

Answers

1. D. Historical cost

2. B. Representational faithfulness

3. C. $105,000

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1. Walsh, Inc. began business on January 1, 2007, and at December 31, 2007, Walsh had the following investment portfolios of equity securities:

Trading Available-For-Sale

Aggregate cost $150,000 $225,000

Aggregate market value 120,000 185,000

None of the declines is judged to be other than temporary. Unrealized losses at

December 31, 2007, should be recorded with corresponding charges against

Income Stockholders’ Equity

A. $70,000 $0

B. $40,000 $30,000

C. $30,000 $40,000

D. $0 $70,000

2. Martin Co. purchased the following portfolio of trading securities during 2007 and reported the following balances at December 31, 2007. No sales occurred during 2007. All declines are considered to be temporary.

Security Cost Market Value at 12/31/2007

X $ 80,000 $ 82,000

Y 140,000 132,000

Z 32,000 28,000

The carrying value of the portfolio at December 31, 2007, on Martin Co.’s balance sheet would be

A. $222,000.

B. $240,000.

C. $242,000.

D. $252,000.

3. An increase in net assets through the issuance of stock

A. Investment by owners

B. Distributions to owners

C. Owners’ equity

D. Revenues

Answers

1. C. $30,000 $40,000

2. C. $242,000.

3. A. Investment by owners

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Time Value of Money

Resource: Ch. 12, 12-A, & 12-C of Health Care Finance

Part I: Complete the following table by inserting your responses to the questions. Cite any sources you use.

Part II: Complete the following table by calculating the ratios.

Answers

Define the time value of money.	AS the worth of money which is received after some specific period can not be equal to the worth of money today, therefore the time value of money concept is used to determine the present value of future cash flows or to find future value of present cash flows at a specified rate.
Provide a real-world example for the time value of money.	Jean will receive $8,500 per year for the next 15 years from her trust. If a 7% interest rate is applied, what is the current value of the future payments Present value of annuity formula = PMT x (1-(1/1+r^n)/r) Pv OF ANNUITY = 8500 *1-1/1.07^15/.07 = 8500*9.108 = 77417
Why is time such an important factor in financial matters?	If you receive cash today and if it is received in future, it has different values. The 100000 received after one year is not equal to today’s 100000 due to discount rate, which can be inflation rate or interest rate. To decide which option is better either to receive cash today or in future, depends on the worth of future payment than today’s payment. If present value or worth of future payment is more than today’s payment it should be accepted otherwise today’s cash is better than future payments.
How would you use the time value of money to your financial benefit?	When some money is put into retirement benefit plan at some specific rate of interest, what amount will be reeived at the time of retirement is calculated by using time value of money.

Present Value

Amount	Compounding period	Rate of interest	Present value
$100,000	Annual	6% for 10 years	55839.47
$70,000	Annual	4% for 15 years	38868.52

Internal Rate of Return

Initial cost of investment	Periods of useful life	Estimated annual net cash inflow generated	Look-up table value	Rate of interest
$75,000	10	$10,190	7.36	6%
$56,000	6	$12,115	4.62	8%

Payback Period: Assume there are no income taxes for both scenarios.

Purchase price of equipment	Period of useful life	Annual revenue generated per year	Operating costs associated with revenue	Depreciation expense per year	Payback period result
$550,000	10 years	$100,000	$32,000	$55,000	8.09 years
$350,000	10 years	$80,500	$36,000	$35,000	7.87 years