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On January 1st. 2017, X Company bought 80% of the outstanding common shares of the Y Company for $140,000 cash. On that date Y Company had $50,000 of common shares outstanding and $60,000 retained earnings. On this date the book values of each of Y's identifiable assets and liabilities were equal to their fair values except for the following:-

Book Value............Fair Value

Inventory.........................................$60,000....................$70,000

Patent...............................................$20,000....................$40,000

The patent had an estimated remaining useful life of 5 years.complete answer all please

Goodwill arising from the purchase was tested annually for impairments. In 2018, $6,000 of goodwill impairment and in 2019 $6,000. In 2021, $2,400 impairment occurred.

The following are the separate entity financial statements of the X & Y Companies at December 31st. 2021:-

X & Y

Balance Sheets

Assets: X...................Y.........

Cash...........................................................$160,000..........$20,000

Accounts receivable........................................220,000.........180,000

Inventory.......................................................600,000.........240,000

Investment in Y............................................. 140,000.............0.........

Equipment(net)............................................. 480,000...........370,000

Patent..............................................................0................ 4,000

TOTAL ASSETS:...........................................$1,600,000........$814,000

Liabilities & Owners' equity:-

Accounts payable..........................................$ 500,000.........$490,000

Future income Taxes....................................... 160,000......... 144,000

Common Shares.............................................. 340,000........... 50,000

Retained Earnings............................................. 600,000.........130,000

TOTAL LIABILITIES & OWNERS' EQUITY...........$ 1,600,000.......$814,000

X&Y

Statement of Income and Retained Earnings

Year ended December 31st. 2021

X........................Y............

Sales...................................................$1,800,000...........$ 720,000

Cost of Goods Sold.................................( 680,000).............(480,000)

Gross Margin........................................... 1,120,000............ 240,000

Amortization expense...................................(60,000)............ (50,000)

Other expenses..........................................(360,000)............(110,000)

Income tax expense....................................(240,000)..............(32,000)

Net Income................................................ 460,000............... 48,000

Retained Earnings, January 1st.2021............... 140,000............... 82,000

Retained Earnings, December 31st. 2021.........$600,000..............$130,000

Additional Information:-

i. On July 1st. 2018, X sold Y a piece of equipment with a net book value of $30,000 for cash consideration of $42,000. This equipment had a remaining useful life of 12 years and both companies use straight-line amortization.

ii. During 2020, Y sold inventory to X for $72,000. X's ending inventory at December 31st. 2020 included $9,100 of goods acquired from Y. Similarly during 2021, Y sold $130,000 of inventory to Y. Of these goods, 20% remained in X's inventory at the end of December 31st. 2021.Y sells its inventories to X at a mark up of 30% on cost.

iii. During 2020, X sold goods to Y from its inventory for $50,000 and in 2021 X sold to Y $60,000. All goods sold by X have a gross profit margin of 30% on the selling price. In 2020, $10,000 of the goods from X remained in Y's inventory and in 2021, 40% of the goods bought from X remained in Y's ending inventory.

iii. Neither Company has ever paid dividends.

iv.

Required:-

i. Calculate the consolidated net income for the year 2021(8 marks).

ii. Prepare the eliminating entry(ies) at acquisition(4 marks).

iii. Calculate the following balances as they would appear on the consolidated income statement for the year ending December 31st. 2021-

a. Cost of Goods sold(3.5 marks).

b. Amortization expense(1.5 marks).

c. Income tax expenses(3 marks).

d. Non-controlling interest(1 mark).

iv. Calculate the following balances as they would appear on the consolidated balance sheet at December 31st.. 2021:-

a. Inventory(1 mark)

b. Equipment, net(1 mark)

c. Future income taxes(1.5 marks)

d. Patent(0.5 mark)

e. Retained earnings(7 marks).

v. Before an investor can present consolidated financial statements certain criteria must be present. List four of those criteria(4 marks).

Problem 1 (Q-theory with depreciation and taxes): Consider an Nfirm industry (N large) in which firms have instantaneous earnings flows: (()) () where () is industry-wide capital, () is firm-specific capital, and 0 () 0 The firm level capital stock adjusts according to = ( ) where is the instantaneous investment flow and is the depreciation rate. The price of capital is unity and firms pay convex adjustment costs (()), with (0) = 0, 0 (0) = 0, and 00 0 Let () represent the NPV of the stream of profits from a marginal unit of installed capital. () = Z = (+)() (()) a. Interpret (). How and why does this definition of () differ from the definition we used in class? Using the Envelope Theorem, show that () = , where () is the value function of a firm. b. Derive the firm's Bellman Equation, and the first-order condition: ()=1+ 0 (()) c. Derive the Bellman Equation associated with (): ( + )() = (()) + () d. Analyze the phase diagram associated with this industry. Plot the = 0 and = 0 loci. Graph the saddle path. How does this diagram differ from the one we derived in class? How does a rise in the depreciation rate affect the steady state level of capital? Explain. 1 e. Now suppose the industry is in steady state. At time period 0 the government announces a temporary investment tax credit which will last until time period 1. The investment tax credit provides a () subsidy per unit of positive (negative) investment (0 1). Derive the first-order condition of the firm during the transition interval [0 1]: ()=1 + 0 (()) f. Plot the transition path of the industry on the phase diagram. In addition, plot the path of and against time. Explain why investment is nonmonotonic over the interval [0 1]. Does a temporary or a permanent investment tax credit have a larger impact on short-run investment? Why? g. Now suppose that the subsidy is pre-announced at period 1 0 In other words, the subidy begins at period 0 and economic agents find out about it at time 1. Plot the transition path of the industry on the phase diagram. In addition, plot the path of and against time. Problem 2 (True, False, or Uncertain). Please explain whether the following statements are True, False, or Uncertain. You will be graded on the quality of your explanation. a. Ito's Lemma implies that second-order terms in the total differential of the value function vanish as 0 b. If an investment tax credit is anticipated before the tax credit starts, investment will rise above its steady state level before the tax credit starts. When the tax credit starts, investment will jump

(c) Suppose your von Neumann-Morgenstern utility function is W. Calculate your expected utility. What sure sum, if offered to you instead of the game, would give you the same utility? (d) Suppose your von Neumann-Morgenstern utility function is lnW. Calculate your expected utility. What sure sum, if offered to you instead of the game, would give you the same utility? (e) Suppose your von Neumann-Morgenstern utility function is 1/W. Calculate your expected utility. What sure sum, if offered to you instead of the game, would give you the same utility? (f) What is the coefficient of relative risk aversion for each of the utility functions in (c)-(e) ? Question 2: Consider the following simplified version of "Who Wants To Be A Millionaire". You have reached the $32,000 level. (Any Princeton student should be able to do that.) Now you face a succession of questions, each with two possible answers. If you answer a question correctly, whether because you know the correct answer or because you make a lucky guess, you proceed to the next higher prize level. We call your first question (the one that if correctly answered takes you to the $64,000 level) "the $64,000 question" for short; similar abbreviations apply to the following levels. The prize doubles at each level. If you answer the $64,000 question correctly and so reach the $64,000 level, you face the $128,000 question, and so on to $256,000, and $512,000. If you reach the $512,000 level, you face one final question, and the correct answer to it will win you $1,024,000. At any level, when you get the question that can take you to the next level, you may choose not to answer it, and leave with the prize of the level you have already reached. At any level, if you answer the next question and your answer is wrong, you will leave with only $32,000. At each level, before you have seen the question that can take you to the next level, there is a probability that you know the correct answer. The questions get successively harder, so these probabilities decline from one level to the next. Before you see the $64,000 question, the probability that you know the answer is 40 percent. If you answer this question successfully to reach the $64,000 level, and before you see the $128,000 question, the probability that you know the answer to that is 35 percent. Similarly, the probabilities are 30 percent for the $256,000 question, 25 percent for the $512,000 question, and 20 percent for the $1,024,000 question. At each level, once you have seen the question, you will know for sure whether you know the correct answer. Thus there is no possibility that you are confident but wrong, or that you know the correct answer but fail to realize that you know. At each level, after you see the question, if you know the correct answer, of course you will give it. If you don't, you have to decide whether to make a guess, which at any level has a 50 percent chance of being correct, or to walk, that is, leave with the amount of the level you have reached. Remember that if you choose to guess and are lucky, you proceed to the next level, but if you choose to guess and are unlucky, you will have to leave with only $32,000, no matter what level you had reached. Your von Neumann-Morgenstern utility function is log2(W/32000), where W is the amount of dollars of your prize. (Note that logs are to base 2, not 10 or e.) 1 (a) What are the utility numbers corresponding to the various possible levels of prizes? (b) Find your optimal strategy, namely your plan of action that prescribes, at each level, whether to make a guess if you don't know the answer to the question, or to walk with the prize of the level you have reached. You have to begin at the end (where you have already reached the $512,000 level) and work your way backward. At each stage you will find it useful to draw a mini "decision t

1. Short review questions Some short review questions on basic concepts and mechanisms to understand microeconomics of banking. 1. Explain, in words, how banks achieve optimal risk sharing through maturity transformation, when there is uncertainty in liquidity demand. 2. What are funding liquidity and market liquidity? Through which channels are they likely to aect the stability of banking system? 3. Why is fragility in banking desirable as a disciplinary device for banks? 4. What is "run-on-the-repos"? Why is it dierent, comparing with the classical bank run? 5. What is securitization? How do banks gain from securitization? What factors explain the rapid growth of securitization? 6. What is shadow banking? Why do banks have the incentives to move their activities to shadow banking? 7. What is credit rationing? How does credit rationing come out of banks' optimal decision? 8. Under what circumstances is financial structure irrelevant to the value of firms? Why do banks need to hold a certain ratio of capital? Why are banks likely to hold less capital than what is socially desired? 9. How do principal-agent problems aect eciency in banking? Give a few examples of the social costs due to principal-agent problems in banking. 1 10. Why do bond market and banks co-exist, or, why some firms can borrow directly from the market while others need bank intermediation? What factors may contribute to such market separation? 11. Does bank competition increase the stability of financial system? Present one theory on bank competition and financial stability, and provide empirical evidence to support your arguments. 2. Risk sharing and financial intermediation Consider a one-good, three-date economy: There are infinitely many ex ante identical consumers, each endowed with one unit of resource at t = 0. Consumption takes place either at t = 1 or t = 2, while the timing preference only gets revealed at t = 1: With probability a consumer is an impatient one (type 1 consumer), who only values consumption at t = 1, while with probability 1 a consumer (type 2 consumer) is a patient one, who only values consumption at t = 2. A consumer's type is private information. Let ci denote the consumption of a type i = 1; 2 consumer, and ex post, the utility from consumption is u(ci) = 1 1 c1 i with > 1. The economy has two technologies of transferring resources between periods: storage technology with gross return equal to 1, and a long-term investment technology with a constant gross return R > 1 at t = 2 for every per unit invested at t = 0. If necessary, an on-going long-term project can be liquidated or stopped prematurely at t = 1, with a return 0 < < 1. (A) Specify the social planner's problem, who wants to maximize a consumer's expected utility at t = 0 by allocating her endowments between two technologies. 1. Compute the optimal allocation, and consumption for each type's consumerdenote the solution as c 1; c 2 ; 2. Why aren't consumption levels for two types' consumers identical? Will there be liquidation at t = 1? 3. What will happen to the consumers' optimal consumption when ! +1? (B) Suppose that the economy is in autarky such that every consumer has to allocate her endowments between two technologies by herself at t = 0. Show that the consumer's ex post consumption is inferior to the solution in (A) 1. 2 (C) Suppose there is a bond market available at t = 1. At t = 1 competitive bond issuers purchase long assets from impatient consumers, issue bonds against these long assets, and sell bonds to the patient consumers (who can pay with the proceeds from their short assets). Each unit of bond bought at t = 1 will deliver one unit of consumption good to the bond holder at t = 2. 1. Compute the equilibrium bond price; 2. Show that the consumer's ex post consumption is inferior to the solution in (A) 1. (D) Suppose there is a competitive banking sector in the economy, in which banks take consumers' endowments as deposits at t = 0 and allocate between the two technologies. Consumers withdraw ci at t = i according to their type i. 1. Show that banks can replicate the optimal solution achieved in (A) 1. 2. Comparing with the result in (B), how can banks improve social welfare in the economy? RDiamond, D. W. and Dybvig, P. H. (1983), Bank runs, deposit insurance, and liquidity, Journal of Political Economy 91, 401-419. 3. Bank run and financial fragility Consider the equilibrium with intermediation, as in Problem 2 (D) in which banks oer consumers the deposit contracts c 1; c 2 at t = 0. (A) Explain why there exist two (Nash) equilbria which are consistent with rational behaviour for all agents: one in which only the early consumers withdraw at t = 1, and another one in which everyone withdraws at t = 1no matter what type he or she is. What is the individual consumption level in the latter equilibrium? Does the existence of multiple equilibria depend on the value of ? (B) Propose a mechanism that can eliminate the bank run equilibrium. Explain how it works. (C) Suppose that it is know in the economy that a small group of consumers always panic at t = 1, i.e., they want to withdraw with certainty at t = 1 no matter what type they actually are. Will there still exist two Nash equilibria as in (A)? RDiamond, D. W. and Dybvig, P. H. (1983), Bank runs, deposit insurance, and liquidity, Journal of Political Economy 91, 401-419. 3 4.

4. A monopolist sells the same product in two markets. The production cost is linear such that is the cost of production in the ith market. The demand equations for each market are: = =1,2 where is the price in the ith market. a. If the monopolist is allowed to set different prices in each market, write down the monopolist's problem and solve for optimal prices and quantity in each market. max12,1111+2222(1+2) FOCs: 1211=0 and 2222=0 so 1=1 12 and 2=2 22. So that prices are 1=1+ 121 and 1=2+ 222 b. Under what conditions, i.e. the values for the demand parameters in each market, will the monopolist opt not to price discriminate? If a1=a2 and b1=b2.

The denominator is negative because that is the second order condition. The numerator is ambiguous. It will be positive if >0. Note >0 because the good is normal. So if that assumption holds, >0. b. How does an increase in income affect the price set by the monopolist? Show an expression that proves this relationship. =+ This is ambiguous. The direct effect is positive but the indirect effect is negative when >0 because <0. 3. There are two consumers with the following utility functions: 1=11 and 2=22 where 1>2. A monopolist supplies the good. It can produce the good at zero marginal cost but it can only produce 10 units of the good at most. The monopolist offers two price-quantity packages: (1,1) and (2,2) where is the cost of purchasing units of the ith good. a. Write the monopolist's profit maximization problem. Hint: It should have four constraints along with a capacity constraint. Identify which constraints are binding. max1,21+2 .. 11 1,222, 222211,111122,1+210 The binding constraints are 22=2 and 111=122 and 1+2=10. b. Substitute these constraints into the monopolist's profit maximization problem and derive the values of (1,1) and (2,2). So now, max1,21112+222 .. 1+2=10 or max 2110+2(21)2 So 1=10 and 2=0. This means that 2=0 and 1=101. 4. A monopolist sells the same product in two markets

1 (i) Ali e and Bob are given 4 to divide among themselves and they agree to do so as follows. Both pi k simultaneously a non-negative integer less or equal to 4 and if the integers add up to 4 or less, ea h gets the amount they named, if the integers are dierent and add up to more than 4, the person who hose the smaller number gets that amount and the other person gets the rest, and if the integers are equal and add up to more than 4, ea h gets 2. (a) Des ribe this situation as a game in strategi form. (5 marks) (b) Find all strategies whi h are stri tly dominated, and all strategies that are weakly dominated. (3 marks) ( ) Find all pure-strategy Nash-equilibria of this game. (4 marks) (d) Show that the sequential elimination of weakly dominated strategies an lose Nash equilibria. (3 marks) (ii) Suppose that two rms produ e similar but not identi al produ ts, and that the unit osts of these produ ts are 10 for rm 1 and 20 for rm 2. The pri es of ea h of these two produ ts depend on the produ tion prole (q1, q2) of both produ ts: p1 = 100 - 6q1 - 2q2 and p2 = 200 - 5q1 - 7q2. Assume that ea h rm i ontrols its produ tion prole qi. (a) Find ea h ompany's produ tion whi h is the best response to the other ompany's produ tion. (6 marks) (b) Find the produ tion prole whi h is a Nash-equilibrium. (4 marks) MAS348 Mock Exam 3 Turn Over MAS348 Mock Exam 2 (i) Consider a nite zero-sum game (S, T, u) and let R and C be the sets of mixed strategies of the row and olumn players, respe tively. (a) Show that max p2R min q2C u(p, q) = max p2R min t2T u(p,b t) where bt is the strategy whi h plays t with probability 1. (10 marks) (b) Let V be the value of this game. Show that p is an optimal strategy for the row player if and only if V = min t2T u(p,b t). (6 marks) (ii) Consider the following zero-sum game given in tabular form A B C I 2 0 -1 II -2 1 3 III 1 1 -2 (a) Find an optimal strategy pair (p, q) under the assumption that both strategies have all pure strategies in their support. (5 marks) (b) Verify that the strategy pair (p, q) is indeed optimal, and nd the value of the game. (4 marks) 3 (i) The Klingons (a beli ose alien ivilization) invade the planet Romulus, and the Romulans need to de ide whether to abandon their planet or to stay put. If they stay and the Klingons ght, both get a payo of 0, whereas if the Klingons run away, Romulans get 2 and Kilngons get 1. If the Romulans run away, they get 1 and the Klingons get 2. Immediately after landing on Romulus, the Klingon ommander needs to de ide whether to destroy her spa eships (and thus eliminating the option to run away if Romulans de ide to stay put). (a) Assuming everyone is rational and well informed, what should the Klingon ommander do? Explain you reasoning in detail. (6 marks) (b) Des ribe this situation in detail as a two-player game in strategi form. (6 marks) ( ) Find a pure strategy Nash equilibrium of this game whi h is not subgame perfe

Attempt all the questions. The allo ation of marks is shown in bra kets. 1 (i) Two andidates A and B run for o e in an ele tion where an odd number of voters must vote for one or the other (abstentions are not allowed). Ea h voter is a supporter of exa tly one of the andidates, and they assign higher utility to the vi tory of their andidate than to the vi tory of the other andidate. (a) Des ribe this situation as a game in strategi form. (6 marks) (b) Find all pure-strategy Nash-equilibria of this game. (5 marks) (ii) Suppose that two rms produ e similar but not identi al produ ts, and that the unit osts of these produ ts are 4 for rm 1 and 6 for rm 2. The pri es of ea h of these two produ ts depend on the produ tion prole (q1, q2) of both produ ts: p1 = 20 3q1 4q2 and p2 = 30 4q1 5q2. Assume that ea h rm i ontrols its produ tion prole qi. (a) Find ea h ompany's produ tion whi h is the best response to the other ompany's produ tion. (6 marks) (b) Find the produ tion prole whi h is a Nash-equilibrium. (4 marks) (iii) Ali e and Bob play a game given in strategi form as follows: L M R u 0, 1 1, 5 2, 2 m 2, 5 5, 4 4, 9 d 3, 0 7, 4 8, 3 Solve this game.