north ltd. plans to manufacture cross country sking equipments. Its cash flow are highly dependant on winter weather. North operates under ideal conditions of uncertainity. on 1st august, 2015 the beginning of its 1st year of operations, north acquires equipment to be used in its operations. The equipment will last for 2 years, after that it will have a salvage value of zero. the company finances the equipment by means of a $500 bank loan at 3% interest rate with the balance financed by issuing common shares.

North's annual net cashflow will be $900 if the weather is snowy and $300 if it is not snowy. Assume cash flows are received at year end. In each year, the objective probablity that the weather is snowy is 0.7 and 0.3 that it is not snowy. The interest rate in the economy is 3% in both years.

North year will pay a dividend of $50 at the end of each year of operation.

Required:

a. In 2015-16 skiing season, the weather is snowy. Prepare a balance sheet at july 31, 2016, at the end of 1st year, an income statement for the year?

b. What timing of revenue recognition is implicit in the income statement you have prepared in the part "a"? When ideal conditions do not hold, is this timing of rvenue recognition relevant? Is it reliable? Explain?

c. Assume that North Ltd. paid the present value you calculated in part "a" for its equipment. Calculate North's net income for the year ended july 31st 2016 on a historical cost basis, assuming that equipment is amortised on a straight line basis. Under the more realistic assumption that ideal conditions do not hold, which measure of net income- present value basis or historic cost basis- is most relevant? Which is most reliable? Why?

THIS QUESTION IS TAKEN FROM QUESTION NUMBER 17TH, CHAPTER 2 OF FINANCIAL ACCOUNTING THEORY 7TH EDITION BY WILLIAM R. SCOTT. I DONT HAVE ANY MORE INFORMATION ABOUT IT.