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Question:
A printing press was purchased on January 1, 20X7, for \$15,000. It has an estimated life of 14 years and a salvage value of \$1,000. The straight-line depreciation method is used. How would the printing press and the related accumulated depreciation be shown on the balance sheet at (a) December 31, 20X7, and (b) December 31, 20X8?
 Assets = Liabilities + Owner’s Equity Cash + Supplies + Equipment = Accounts Payable + Capital -1 50000 0 0 0 50000 -2 -27000 0 27000 0 0 Balance 23000 0 27000 0 50000 -3 -2000 2000 0 0 0 Balance 21000 2000 27000 0 50000 -4 11600 0 0 0 11600 Balance 32600 2000 27000 0 61600 -5 -900 0 0 0 -900 Balance 31700 2000 27000 0 60700 -6 -1800 0 0 0 -1800 Balance 29900 2000 27000 0 58900 -7 -3000 3000 0 0 0 Balance 26900 5000 27000 0 58900 -8 -1500 0 0 0 -1500 Balance 25400 5000 27000 0 57400

 Assets = Liabilities + Owner’s Equity Cash + Supplies + Equipment = Accounts Payable + Capital -1 12000 0 0 0 12000 -2 -220 220 0 0 0 Balance 11780 220 0 0 12000 -3 -1500 3500 0 2000 0 Balance 10280 3720 0 2000 12000 -4 -825 0 0 0 -825 Balance 9455 3720 0 2000 11175 -5 1850 0 0 0 1850 Balance 11305 3720 0 2000 13025 -6 -375 0 0 0 -375 Balance 10930 3720 0 2000 12650 -7 -500 0 -500 0 Balance 10430 3720 0 1500 12650 -8 0 -60 0 0 -60 Balance 10430 3660 0 1500 12590

 Lucky Dip Ice Cream Consulting Income Statement Year Ended December 31, 19x8 Fees Incomes 66,700 Operating Expenses Wages Expense 31,500 Rent Expense 7,200 Supplies Expense 700 Miscellaneous Expense 900 Total Operating Expenses 40,300 Net Income 26,400

 Lucky Dip Ice Cream Consulting Statement of Owner’s Equity Year Ended December 31, 19x8 Capital, January 1, 19x8 18,000 Net Income for the Year 26,400 Less: Withdrawals 20,000 Increase in Capital 6,400 Capital, December 31, 19x8 24,400

 Lucky Dip Ice Cream Consulting Balance Sheet December 31, 19x8 ASSETS Current Assets Cash 11,000 Accounts Receivable 13,000 Supplies 5,700 Total Current Assets 29,700 LIABILITIES Accounts Payable 2,500 Notes Payable 2,800 Total Liabilities 5,300 OWNER’S EQUITY John Sweet, Capital 24,400 Total Liabilities and Owner’s Equity 29,700

 Depreciation= Purchase price of the asset- Salvage value Useful life of asset Depreciation as on December 31, 20X7 Depreciation = 15000-1000 14 = 14000 14 = 1000

 (a) As on December 31, 20X7 Amount Cost of the printing press 15000 Less: Depreciation for the year 1000 Balance as on December 31, 20X7 14000 (b) As on December 31, 20X8 Amount Cost of the printing press 15000 Less: Depreciation for the year 2000 Balance as on December 31, 20X8 13000

 (a) Working Capital Working Capital = Current asset- Current liabilities = 233000-176000 = 57000 (b) Current Ratio Current Ratio = Current Asset Current liabilities = 233000 176000 = 1.32 ( c) Quick Ratio Quick Ratio = Current asset - Inventories - Prepaid expenses Current liabilities = 233000-120000-1000 176000 = 112000 176000 = 0.64

Account receivable turnover=

 Net sales Average account receivables Particulars 20X2 20X1 Net credit sales 2600000 3100000 Average account receivables 400000 416000 Account receivable turnover 6.5 7.45

As per our calculations, we can conclude that the average collection period for the receivables in 2011 was 7.45 times and that in 2012 was 6.5 times. This indicates that the frequency of collection of debt has reduced form 7.45 times to 6.5 times.

We have the following formulas:

 Payback Period = a+(b/c) Where, A = Last period with negative cash flow B = Cumulative cash flow for period a C = Cash flow for the period after a

 Accounting Rate of Return = Average Accounting Profit Average Investment Average Accounting Profit = Cash flow-Depreciation

Calculation of Payback period:

 Calculation of Payback Period - Project A Year Cash Flows Cumulative Cash Flow 0 -3,50,000 -3,50,000 1 1,00,000 -2,50,000 2 2,00,000 -50,000 3 1,00,000 50,000 4 1,00,000 1,50,000 5 1,40,000 2,90,000 Pay Back Period for Project A = 2.50 Calculation of Payback Period - Project B Year Cash Flows Cumulative Cash Flow 0 -3,50,000 -3,50,000 1 40,000 -3,10,000 2 1,00,000 -2,10,000 3 2,10,000 - 4 2,60,000 2,60,000 5 1,60,000 4,20,000 Pay Back Period for Project B = 3.00 Calculation of Payback Period - Project C Year Cash Flows Cumulative Cash Flow 0 -3,50,000 -3,50,000 1 2,00,000 -1,50,000 2 1,50,000 - 3 2,40,000 2,40,000 4 40,000 2,80,000 5 - 2,80,000 Pay Back Period for Project C = 2.00

Calculation of Accounting Rate of Return:

 Calculation of Accounting Rate Return - Project A Average Cash Flow = 6,40,000 = 1,28,000 5 Average Depreciation = 70,000 Average Accounting Profit = 128000-70000 = 58,000 Average Investment = 3,50,000 = 1,75,000 2 Accounting Rate of Return = 58,000 = 33.14% 1,75,000 Calculation of Accounting Rate Return - Project B Average Cash Flow = 7,70,000 = 1,54,000 5 Average Depreciation = 70,000 Average Accounting Profit = 154000-70000 = 84,000 Average Investment = 3,50,000 = 1,75,000 2 Accounting Rate of Return = 84,000 = 48.00% 1,75,000 Calculation of Accounting Rate Return - Project C Average Cash Flow = 6,30,000 = 1,26,000 5 Average Depreciation = 70,000 Average Accounting Profit = 126000-70000 = 56,000 Average Investment = 3,50,000 = 1,75,000 2 Accounting Rate of Return = 56,000 = 32.00% 1,75,000

Calculation of Net Present Value:

 Calculation of Net Present Value - Project A Year Cash Flows PV Factor @ 9% Present Value 0 -3,50,000 1 -3,50,000 1 1,00,000 0.9174 91,743 2 2,00,000 0.8417 1,68,336 3 1,00,000 0.7722 77,218 4 1,00,000 0.7084 70,843 5 1,40,000 0.6499 90,990 Net Present Value 1,49,130 Calculation of Net Present Value - Project B Year Cash Flows PV Factor @ 9% Present Value 0 -3,50,000 1 -3,50,000 1 40,000 0.9174 36,697 2 1,00,000 0.8417 84,168 3 2,10,000 0.7722 1,62,159 4 2,60,000 0.7084 1,84,191 5 1,60,000 0.6499 1,03,989 Net Present Value 2,21,203 Calculation of Net Present Value - Project C Year Cash Flows PV Factor @ 9% Present Value 0 -3,50,000 1 -3,50,000 1 2,00,000 0.9174 1,83,486 2 1,50,000 0.8417 1,26,252 3 2,40,000 0.7722 1,85,324 4 40,000 0.7084 28,337 5 - 0.6499 - Net Present Value 1,73,399

We summarise the above information as below:

For pay-back period we have:

 Pay Back Period for Project A = 2.5 Pay Back Period for Project B = 3 Pay Back Period for Project C = 2

Pay-back period indicates the time period in which the investments made are recovered. Lower the period better it is for the investors. In the given case we see that project C has the lowest pay-back period of 2 years. Therefore, based on pay-back period project C should be accepted.

For accounting rate of return we have:

 Accounting Rate of Return for project A = 33.14% Accounting Rate of Return for project B = 48% Accounting Rate of Return for project C = 32%

Accounting rate of return measures the percentage of average profits earned by a project during its life time. Since it measures return, higher the ratio better it is. In the given scenario we see that the ARR for project B is maximum, 48%. Therefore, as per accounting rate of return project B should be opted for.

For Net Present Value we have:

 Net Present Value for project A = 1,49,130 Net Present Value for project B = 2,21,203 Net Present Value for project C = 1,73,399

Net present value is the tool which helps to measure the present value of the cash flows from a given project. The project with higher net present value is better. In the given case we see that net present value for project B is the highest with \$221203. Therefore based on Net present value approach Project B should be opted for. (Collier, 2013)

Therefore, based on all the attributed and calculations above we can conclude that the investor should invest in project B, as it would provide higher returns than the other projects.

 Calculation of expected cash receipts Particulars June July August Sales 70,000 1,00,000 1,00,000 Cash for sales of current month 35,000 50,000 50,000 Cash for sales of last month 15,000 17,500 25,000 Cash for sales of last second month 16,250 15,000 17,500 Total Cash Inflow 66,250 82,500 92,500

 In the books of Maris Brothers Inc Cash Disbursement Schedule Particulars April May June Cash inflow form sales 5,60,000 6,10,000 6,50,000 Less: Cash paid for Purchases 3,24,600 3,56,400 3,80,400 Cash paid for Rent 8,000 8,000 8,000 Cash paid for Wages & Salaries 45,200 48,700 51,500 Cash paid for Taxes - - 54,500 Cash paid for Fixed Asset 75,000 - - Cash paid for interest - - 30,000 Cash paid for dividend 12,500 - - Net Cash flow for the month 94,700 1,96,900 1,25,600

 Workings Calculation of Purchases Particulars February March April May June July August Sales 5,00,000 5,00,000 5,60,000 6,10,000 6,50,000 6,50,000 Purchases 3,00,000 3,36,000 3,66,000 3,90,000 3,90,000 - - Cash paid in the month of purchase 30,000 33,600 36,600 39,000 39,000 - - Cash paid for 1 month after purchase - 1,50,000 1,68,000 1,83,000 1,95,000 1,95,000 - - Cash paid for 2 month after purchase - - 1,20,000 1,34,400 1,46,400 1,56,000 1,56,000 Total Cash paid for Purchases 30,000 1,83,600 3,24,600 3,56,400 3,80,400 3,51,000 1,56,000 Calculation of Wages & Salaries Particulars February March April May June July August Fixed Wages 6,000 6,000 6,000 6,000 6,000 6,000 6,000 Variable Wages (7% of sales of current month) 35,000 35,000 39,200 42,700 45,500 45,500 - Total Cash paid for Wages & Salaries 41,000 41,000 45,200 48,700 51,500 51,500 6,000

a.The above diagram shows the cash flow from the project over the project life.

b.We assume that the required rate of return for the given project is 10% and that the amount earned is reinvested in the business. Taking this information into consideration, we can see that the investor would require earning at least \$2500 in the first year, \$2750 in the second year and so on.

c. The above diagram shows the how the present value of the cash flows earned is to be discounted. The amount earned in year 3 is to be discounted with the factor for 3 years in order to arrive at the present value today.

The financial managers generally rely on present value approach in order to determine the viability of a project. The interest rate or the required rate of return keeps changing. Therefore, while calculating the future value, we need to determine the interest rates for all the years separately. This is a tedious job and often leads to wrong conclusions. In the present value approach, the calculations are made on the required rate of return which exists currently. This saves time and narrows the room for errors.

 Let the amount be x We know, FV=PV * [(1+i)^n] Here, FV=PV * [(1+i)^n] FV= Future Value PV= Present Value i= Interest Rate n= time period for investment We are provided with the following information FV= 6000 i= 0.12 n= 6 years Putting this in the above formula we get, PV = FV [(1+i)^n] Therefore, PV = 6000 [(1+0.12)^6] PV = 3,039.79 Therefore, investment of \$3039.79 will result in \$6000 in 6 years with interest of 12% per annum.

In the given case we need to find the present value of some amount which turns out to be \$6000 after 6 years with 12% required rate of return. Therefore applying the present value formula helps to determine the same. If we invest \$ 3,039.79 today, then we will receive \$6000 at the end of 6 years with 12% interest.(Loughran, 2011)

We are to receive \$ 6000 at the end of 6 years. If we discount it with the interest rate factor of 125 for 6 years we get the present value as \$3,039.79

Given an opportunity cost of 12%, the investor would require to earn 12% in order to make up for the opportunity lost. Therefore, taking this in consideration the investor is required to invest \$3,039.79 in order to receive \$6000 after 6 years today.

In all the above cases we are required to find the present value of the future amount \$6000, given an interest rate of 12% and 6 years. The requirements in each of the cases presented are same, only the situation is different. Therefore, an investor needs to invest \$ 3,039.79 today in order to receive \$6000 on completion of 6 years.

References

Collier, P. (2013). Accounting for managers. Milton: John Wiley & Sons.

Loughran, M. (2011). Financial accounting for dummies. Hoboken (NJ): Wiley.

Cite This Work

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