Question
Since I missed all the excitement while I was working on a different client, why dont you share the details of the transaction? demanded Sylvia.
Since I missed all the excitement while I was working on a different client, why dont you share the details of the transaction? demanded Sylvia. Well, MicroDex was carrying the investment at $5,100,000 and sold it to Greenco for $8,000,000. So they booked a $2,900,000 gain on the transaction, Daniel confidentially replied. Sylvia looked troubled and finally confided to Daniel, Im enrolled in a CPA review course and last week we studied long term receivables and payables. I learned that generally accepted accounting principles (GAAP) require notes receivable due in more than one year to be carried at their present value. Wouldnt that affect the profit you reported? Daniel looked at Sylvia like she was trying to put him on the spot and icily replied, I explained that MicroDex didnt incur any interest on this investment before the sale, so present value calculations arent necessary! And, yes, the income statement we audited is consistent with GAAP.
MicroDex Income Statements For the four years ended December 31, 2004 (in 000s except per share amounts) 2004 2003 2002 2001 Net Revenues and Gains $27,500 $26,300 $25,100 $20,900 Expenses and Losses: Cost of Sales 15,200 12,150 9,845 9,200 Operating Expenses 3,160 3,075 2,890 2,300 Other 4,570 3,966 3,146 2,214 Taxes 1,690 2,671 3,318 2,515 Net Income $2,880 $4,438 $5,901 $4,671 Common Shares Outstanding 3,000 3,000 3,000 3,000
1) Calculate the present value of the note receivable using a 15% interest rate.
Using the present value of the note as the only economic benefit received, recalculate the gain or loss on the transaction.
Assume Peter Nelson LLP breached the duty of care owed to the Bank of Business
Solutions. Were the damages sustained by the Bank of Business Solutions caused by
Peter Nelsons breach of the duty of care? In answering this question do the following:
2) correct the 2004 income statement?
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