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?
Answer:
|
|
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 =
|
2.50
|
|
Pay Back Period for Project B =
|
3.00
|
|
Pay Back Period for Project C =
|
2.00
|
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.
