Suppose that Myers and Myers in P3€“8 paid no dividends during 2018 and that the December 31, 2018 balance sheet looks like the one below. 

Assume that the investor in P3€“8 was correct (i.e., the company produced $20,000 cash during 2018) and that the investor€™s expectations at the end of 2018 are unchanged. Assume further that an objective appraisal of the company€™s assets revealed the following FMVs as of December 31, 2018:

Cash ...............................................................$ 30,000
Short-term investments .................................20,000
Land ..................................................................66,000
Buildings ..........................................................32,000
Total FMVs ...................................................$148,000

REQUIRED:
a. What dollar amount did Myers and Myers report in 2018 for net income under generally accepted accounting principles?
b. Calculate net income during 2018, using fair market values as the asset and liability valuation bases (i.e., FMV₂₀₁₈ ˆ’ FMV₂₀₁₇).
c. Calculate economic income for 2018 (i.e., cash received during 2018 plus the change in present value). The discount rate is still 10 percent.
d. Discuss the differences among these three measures of income. Discuss some of the strengths and weaknesses of each measure.

Transcribed Image Text:

Liabilities and Shareholders' Equity Current liabilities Assets $ 6,000 $ 30,000 Cash Short-term investments Long-term liabilities 20,000 20,000 Land Common stock 20,000 80,000 Retained earnings Buildings 76,000 40,000 Total liabilities and Total assets shareholders' equity $146,000 $146,000