Difference between accounting income and economic income

Reference no: EM131418488

On January 1, 2011, Barry Smith established a company by contributing $90,000 and using all of the cash to purchase an apartment house. At the time, he estimated that cash inflows due to rentals would be $65,000 per year, while annual cash outflows to manage and maintain it would be $45,000. He felt that the apartment house had a ten-year life and could be sold at the end of that time for $40,000. He also estimated that the effective interest rate during the ten-year period would be 10 percent. (This problem requires knowledge of present value. Refer to Appendix A.)

REQUIRED:

a. What is the book value of the building as of January 1, 2011? Assuming that Barry's estimates are correct, what is the economic value of the building? In your opinion, did Barry make a wise investment?

b. On December 31, 2011, Barry prepares financial statements and observes that his estimates were exactly correct. Assuming that cash inflows equal revenues, cash outflows equal expenses, and the net cost of the apartment, $50,000 ($90,000 - $40,000), is depreciated evenly over the ten-year period, prepare the income statement and balance sheet for Barry's apartment house.

c. Calculate the economic income of the apartment building for 2011. Economic income equals the difference between the present value at the beginning of the year and the present value at the end of the year plus any cash received during the year. Why is there a difference between accounting income and economic income?

d. What is the value on Barry's books of the apartment building at the end of 2011? What is the present value of the apartment building at that time?

Reference no: EM131418488

Questions Cloud

Identify four situations in a career : Identify four situations in a career where conducting a job search would be necessary. Describe what your job campaign would consist of. Your response should be at least 200 words in length

How is procrastination different from laziness : How is procrastination different from laziness? What are some techniques you can use to avoid and overcome the pitfalls of procrastination?

Discuss the fair labor standards act flsa provisions : Discuss the Fair Labor Standards Act (FLSA) provisions. Determine which provisions might apply or not apply to security personnel

Why is it important for consumer product companies : What is Internet of Things and Why is it important for Consumer Product Companies?

Difference between accounting income and economic income : What is the book value of the building as of January 1, 2011? Assuming that Barry's estimates are correct, what is the economic value of the building? In your opinion, did Barry make a wise investment?

What is the book value of manpower : Explain why there is a difference between the book value of Manpower and the amount you are willing to pay for it. What assumptions and/or principles of financial accounting are important here?

Delineate the positive outcomes from the two case studies : After reading the study: List the major concepts within the article, Delineate the positive outcomes from the two case studies and Comment on the stated next steps

Explain relationship between organization mission-strategy : What social and/or cultural factors played a role in this consumer purchasing the smartphone and data plan? This is for Smartphones, Seniors, and Purchase Decisions. Explain the relationship between Organization’s mission and strategy. What are the d..

What modifier code is appended to the cpt code : An unrelated procedure in the postoperative period is indicated with modifier.Dr. Brown stops a surgical procedure due to the patient's reaction to anesthesia. What modifier code is appended to the CPT code?What function does the times symbol (×) in..

User Account

All Pages