This problem is designed to follow P4-7. Suppose that Myers and Myers paid no dividends during 1997, and the December 31, 1997 balance sheet is listed below. (This problem requires knowledge of present value calculations. Refer to Appendix 4A.) Chapter 4 The Measurement Fundamentals of Financial Accounting 1 75 (Different methods of recognizing revenue) (Revenue recognition and net income) Assets Liabilities and Stockholders’ Equity Cash $ 30,000 Current liabilities $ 6,000 Short-term investments 20,000 Long-term liabilities 20,000 Land 20,000 Common stock 80,000 Buildings and machinery 76,000 Retained earnings 40,000 Total liabilities and Total assets $ 146,000 stockholders’ equity $ 146,000 Assume that the investor in P4-7 was correct (i.e., the company produced $20,000 cash during 1997) and that the investor’s expectations at the end of 1997 are unchanged. Assume further that an objective appraisal of the company’s assets revealed the following FMVs as of December 31, 1997. Cash $ 30,000 Short-term investments 20,000 Land 66,000 Buildings and machinery 32,000 Total FMVs $148,000 REQUIRED:

a. What dollar amount did Myers and Myers report in 1997 for net income under generally accepted accounting principles?

b. Calculate net income during 1997 using fair market values as the asset and liability valu¬ ation bases (i.e., $FMVJ997 - $FMV1996).

c. Calculate economic income for 1997 (i.e., cash received during 1997 plus the change in present value). The discount rate is still 10 percent.

d. Discuss the differences among these three measures of income. Discuss some of the strengths and weaknesses of each measure.