Flamenco Corporation operates under ideal conditions of certainty. It acquired its sole assets (a pen making machine) on January 1, 2019. The asset will yield $500 cash for 4 years at the end of the year; from 2018 to 2022, inclusive, after which it will have no salvage value or disposal costs. The interest rate in the economy is 5%. Purchase of the asset was financed by the issuance of common shares. Flamenco Corporation will pay no dividend at the end of each year.

Required

a. Prepare balance sheet and income statement as at the end of December 31, 2019. (8 marks)

b. Under ideal conditions, what is the relationship between present value and market value? Explain why. Is this true of the real world? Explain why. (4 marks)