Reference no: EM13517099

EXHIBIT 13-14 Current Value Income Statements
For the Year Ending December 31, 2001 and 2002
	2001	2002
Revenues	$3,000	$3,000
Expenses   Depreciation   Bond Interest	$1,100a     155	$1,210b     155
Total Expenses	$1,255	$1,365
Net Income	$1,745	$1,635
a  Replacement cost of $2,200 ¸ 2 years = $1,100. Replacement cost is $2,000 x 1.1. b  Replacement cost of $2,420 ¸ 2 years = $1,210. Replacement cost is $2,200 x 1.1.

 

EXHIBIT 13-15 Current Maintenance Schedule
	(1)	(2)	(3)	(4)	(5)	(6)	(7)
	12/31/00	Conversion Factor	Restated in 2001 Dollars	12/31/01	Conversion Factor	Value in 2001 Dollars	Net Specific Changeb
Cash	--			$2,845a	--	$2,845	$2,845
Fixed Assets	$2,000	110/100	$2,200	2,000	110/100	2,200	--
Less: Accumulated depreciation	--		--	(1,000)	110/100	(1,100)	(1,100)
Total Assets	$2,000		$2,200	$3,845		$3,945	$1,745
15 1/5% bonds payable	1,000		1,000	1,000	--	1,000	--
Owners’ Equity	$1,000		$1,200	$2,845	--	$2,945	$1,745
a.  Before payment of dividends b.  Column 6 minus Column 3

 

	2000	2001	2002
General price index	100	110	106
Specific price index applicable to the firm’s merchandise inventory	100	103	97
Specific price index applicable to the firm’s fixed assets	100	115	125

1. Using the balance sheet and income statement shown in Exhibits 13-4 and 13-5, construct the following types of income statements for 2002:

a.         GPLA
b.         DI
c.         RI
d.         EPI

Use the following general and specific indexes:

2.  Show capital maintenance proofs for GPLA and DI in Problem 1.

	2000	2001	2002	2003	2004
Fixed asset index	100	95	108	120	125
General price index	100	110	115	112	125

3.  An asset is acquired at a cost of $10,000 with a five-year life and no anticipated salvage value.  Straight-line depreciation is considered appropriate.  The asset was acquired on January 2, 2000.  Price indexes for the five years are
Required:
a. Compute the current value depreciation for each year.
b. What is the realized real holding gain for the years 2001-2004?
c.What would the holding gain be under EPI for the years 2001-2004?

4.  Desoto, Inc., manufactures chemical coatings (consumer paints, industrial coatings, and specialty products, which include detergents and other household cleaning products).  The company is an important supplier to Sears, Roebuck and Co.  Shown here is information from DeSoto’s 1984 annual report on earnings from continuing operations in both historical cost and current cost terms applying SFAS No. 33.  From this information, estimate the following current cost income numbers:

Required:
a. Distributable income.
b. Realized income (assume that 20 percent of the total real holding gains  have been realized).
c. Earning power income.
d. Comment on DeSoto’s price increases during the current year as compared to past years.

Statement of Earnings Adjusted for Changing Prices For the Year Ended December 31, 1984 (in thousands of dollars)
	As Reported In the Primary Financial Statements (Historical Cost)	Adjusted for Changes in Specific Prices (Current Cost)
Continuing Operations
Net Sales	$407,439	$407,439
Cost of sales	$330,386	$330,734
Selling, administrative   & general expenses Interest expense Retirement security   program Interest income Provision for Income   Taxes	39,251       2,998       2,321      (2,070)     15,800	39,258       2,998       2,321       (2,070)     15,800
Earnings from Continuing Operations	$  18,753	$  18,398
Gain From Decline in Purchasing Power of Net Amounts Owed		$      500
Increase in Specific Prices (Current Cost) of Inventories and Property, Plant and Equipment Held During the Year		$    3,000
Effect of Increase in General Price Level		$    6,400
Increase in Specific Prices Over (Under) Increase in the General Price Level		$    (3,100)
Courtesy of DeSoto, Inc.

5.  Allentown Paving owns a cement mixer which is 3 years old with an expected life of 10 years.  The machine originally cost $3,000,000.  Replacement cost prior to the appearance of the new technology was $2,200.000.  A newer machine comes on the market with a cost of $3,600,000.  Annual production of both technologies is 300,000 barrels of cement.  Variable cost per barrel is $1 with the old mixer and $.50 for the new mixer.  Allentown’s cost of capital is 8 percent.  The new machine has an extra life of 10 years.

Required:
a.Assuming that the old cement mixer is to be kept, determine the obsolescence writedown if current values are being used.

6.Cedros Company issued $10,000 of three-year debenture bonds on January 1, 2001.  The bond interest is payable on December 31 of 2001-2003, with principal being repaid on December 31, 2003.  The interest rate is 11.3 percent consisting of the company’s basic rate of 5 percent and anticipated inflation of 6 percent (1.05 x 1.06 = 1.113 and 1.113 – 1 = 11.3 percent).  The actual rate of inflation turned out to be 9 percent.

Required:
a. What is the present value on January 1, 2001, of the gain or loss to shareholders as a result of the anticipated rate of inflation being 6 percent   and the actual rate being 9 percent?
b. Is this gain or loss to shareholders also a gain or loss to Cedros?  Discuss.

7. Listed here are several value listings for entry value (EV), exit value (NRV), and present value in each of four periods for an asset.

Period	EV	NRV	PV
1	$28,000	$24,000	$36,000
2	30,000	22,000	26,000
3	24,000	29,000	27,000
4	27,000	32,000	35,000

Required:
a. Determine the deprival value (value in use) in each of the four periods.
b. Discuss the economic (and accounting) meaning of the deprival value concept.