The December 31 balance sheet and the income statement for the period ending December 31 for Buyable
Question:
The December 31 balance sheet and the income statement for the period ending December 31 for Buyable Goods follow. (This problem requires knowledge of present value. Refer to Appendix 4A.) Balance Sheet Income Statement Current assets Long-lived assets $10,000 20,000 Liabilities Common stock Retained earnings Total liabilities and stockholders’ equity $12,000 8,000 10,000 Sales Expenses Net income $30,000 (24,000) $ 6,000 Total assets $30,000 $30,000 Mr. Black is interested in purchasing Buyable Goods. He has analyzed the future prospects of the company and estimates that it should be able to maintain at least its current earnings amount for the next ten years, at which time the assets would be worthless. He also estimates that the discount rate over that time period will be 12 percent. REQUIRED:
a. Assuming that net income is equal to cash inflows, how much should Mr. Black be will¬ ing to pay for Buyable Goods?
b. What is the book value of Buyable Goods?
c. Explain why there is a difference between the book value of Buyable Goods and the amount Mr. Black is willing to pay for it. What assumptions and/or principles of financial accounting are important here?
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