15. Undoubtedly Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2019. The asset will yield $725 cash at the end of each year from 2019 to 2021, inclusive, after which it will have no market value and no disposal costs. The interest rate in the economy is 5 percent. Purchase of the asset was financed by the issuance of common shares. Undoubtedly Corp. will pay a dividend of $50 at the end of 2019 and 2020. Required a. Prepare a balance sheet for Undoubtedly Corp. at the end of 2019 and an income state- ment for the year ended December 31, 2019. b. Prepare a balance sheet for Undoubtedly Corp. as at the end of 2020 and an income statement for the year ended December 31, 2020. c. Under ideal conditions, what is the relationship between present value (i.e., value in use) and market value (i.e., fair value)? Why? Under the real conditions in which accountants operate, to what extent do market values provide a way to implement fair value accounting? Explain.
15. Undoubtedly Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2019. The asset will yield $725 cash at the end of each year from 2019 to 2021, inclusive, after which it will have no market value and no disposal costs. The interest rate in the economy is 5 percent. Purchase of the asset was financed by the issuance of common shares. Undoubtedly Corp. will pay a dividend of $50 at the end of 2019 and 2020. Required a. Prepare a balance sheet for Undoubtedly Corp. at the end of 2019 and an income state- ment for the year ended December 31, 2019. b. Prepare a balance sheet for Undoubtedly Corp. as at the end of 2020 and an income statement for the year ended December 31, 2020. c. Under ideal conditions, what is the relationship between present value (i.e., value in use) and market value (i.e., fair value)? Why? Under the real conditions in which accountants operate, to what extent do market values provide a way to implement fair value accounting? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Q15
Transcribed Image Text:15. Undoubtedly Corp. operates under ideal conditions of certainty. It acquired its sole asset on
January 1, 2019, The asset will yield $725 cash at the end of each year from 2019 to 2021,
inclusive, after which it will have no market value and no disposal costs. The interest rate in
the economy is 5 percent. Purchase of the asset was financed by the issuance of common
shares. Undoubtedly Corp. will pay a dividend of $50 at the end of 2019 and 2020.
Required
a. Prepare a balance sheet for Undoubtedly Corp. at the end of 2019 and an income state-
ment for the year ended December 31, 2019.
b. Prepare a balance sheet for Undoubtedly Corp. as at the end of 2020 and an income
statement for the year ended December 31, 2020.
c. Under ideal conditions, what is the relationship between present value (i.e., value in use)
and market value (i.e., fair value)? Why? Under the real conditions in which accountants
operate, to what extent do market values provide a way to implement fair value accounting?
Explain.
d. Under real conditions, present value calculations tend to be of low reliability. Why? Does
this mean that present value-based accounting for assets and liabilities is not decision-
useful? Explain.
Note: In the following two problems, the capital asset is financed in part by means of
interest-bearing bonds. This is not illustrated in the text.
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