Reference no: EM132907501

Klatle Investments Corp. owns 100% of the shares of Lil'wat Stores Inc. (LSI) and is looking at the option of selling the subsidiary. As a result, Klatle has decided to hire an expert to put together a valuation of LSI using the replacement cost method to give it an idea of what it might receive for the asset.

Below is the most recent statement of financial position for LSI, along with estimates of current replacement costs for the assets.

                                                            Book value                Current replacement value
Cash $ 20,000
Accounts receivable                          523,000                      $ 476,000
Inventories                                      1,875,000                    1,985,000
Property, plant, and equipment            14,258,000                   17,654,000
Total assets $16,676,000

Bank loan $ 1,500,000
Accounts payable 1,850,000
Income taxes payable 520,000
Mortgage payable 8,151,000
Total liabilities 12,021,000

Preferred shares 545,000
Common shares 1,250,000
Retained earnings (deficit) 2,860,000
Total liabilities and shareholders' equity $16,676,000

Problem 1: LSI owns a patent that is not reflected on the statement because it was internally developed. The patent was recently appraised at $1,600,000. All of the liabilities reflect their settlement values. However, if the company is sold, early payout penalties on the mortgage of $550,000 would have to be paid. What is the total value of LSI using the replacement cost method for the common shareholders at this time?

a) $8,599,000
b) $8,619,000
c) $9,164,000
d) $9,169,000