P Ltd. operates under ideal conditions of certainty. It has just bought a capital asset for $

Question:

P Ltd. operates under ideal conditions of certainty. It has just bought a capital asset for $ 3,100, which will generate $ 1,210 cash flow at the end of one year and $ 2,000 at the end of the second year. At that time, the asset will be useless in operations and P Ltd. plans to go out of business. The asset will have a known salvage value of $ 420 at the end of the second year. The interest rate in the economy is constant at 10% per annum.

P Ltd. finances the asset by issuing $ 605 par value of 12% coupon bonds to yield 10%. Interest is payable at the end of the first and second years, at which time the bonds mature. The balance of the cost of the asset is financed by the issuance of common shares.

Required

a. Prepare the present value- based balance sheet at the end of the first year and an income statement for the year. P Ltd. plans to pay no dividends in this year.

b. Give two reasons why ideal conditions are unlikely to hold.

c. If ideal conditions do not hold, but present value- based financial statements are prepared anyway, is net income likely to be the same as you calculated in part a? Explain why or why not.

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Par Value
Par value is the face value of a bond. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. The market price of a bond may be above or below par,...