Henry Corp. operates under ideal conditions of certainty. It acquired its sole asset on January 1, 2018. The asset will yield $600 cash at the end of each year from 2018 to 2020, inclusive, after which it will have no market value and no disposal costs. The interest rate in the economy is 4%. Purchase of the asset was financed by issuance of common shares. Henry Corp. will pay a dividend of $60 at the end of 2018 and 2019.

Required:

a. Prepare a balance sheet for Henry Corp. as of the end of 2018 and an income statement for the year ended December 31, 2018 using value-in-use accounting.

b. Prepare a balance sheet for Henry Corp. as of the end of 2019 and an income statement for the year ended December 31, 2019 using value-in-use accounting.

c. In this particular circumstance, would accounting using historical cost and straight-line depreciation have a significant effect relative to the value-in-use accounting from a and b. Why or why not? [You shouldn’t need to do any calculations to figure this out.]

d. Discuss the relationship between present value (i.e. value-in-use) and market value (i.e. fair value) under ideal conditions (you can assume investors are risk neutral). Discuss the extent to which market values provide a way to implement fair value accounting under the real conditions in which accountants operate.

e. Under real conditions, present value calculations tend to be of low reliability. Discuss why this is the case. Does this mean that present value-based accounting for assets and liabilities is not decision useful? Explain your answer.