Sure Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2008.
Question:
Sure Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2008. The asset will yield $500 cash at the end of each year from 2008 to 2010, inclusive, after which it will have no market value and no disposal costs. The interest rate in the economy is 6%. Purchase of the asset was financed by the issuance of common shares. Sure Corp. will pay a dividend of $50 at the end of 2008 and 2009. Required
a. Prepare a balance sheet for Sure Corp. as at the end of 2008 and an income statement for the year ended December 31, 2008.
b. Prepare a balance sheet for Sure Corp. as at the end of 2009 and an income statement for the year ended December 31, 2009.
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 problem, the capital asset is financed in part by means of interest- bearing bonds.
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