Sure Corp Accounting Theory Assignment

Question 1: Chapter 2 #15

PV0 = 600/1.06 + 600/1.062 + 600/1.063 = $1604

PV1 = 600/1.06 + 600/1.062 = $1100

PV2 = 600/1.06 = $566

a)

Sure Corp

Balance Sheet

December 31, 2015

Financial Asset Shareholder’s Equity

Cash $ 550 Opening Balance $ 1603

Asset 1100 Dividends (50)

Net Income 96

$ 1650 $ 1650

Sure Corp

Income Statement

Year Ended December 31, 2015

Accretion of Discount (1603 x 6%) $ 96

b)

Sure Corp

Balance Sheet

December 31, 2016

Financial Asset Shareholder’s Equity

Cash $ 1100 Opening Balance $ 1650

Asset 566 Dividends (50)

Net Income 66

$ 1666 $ 1666

Sure Corp

Income Statement

Year Ended December 31, 2016

Accretion of Discount (1100 x 6%) $ 66

c) Under ideal conditions, present value is generally equal to market value, since we can accurately estimate future cash flows with certainty, and the risk-free interest rate is provided. This is due to arbitrage; in a reasonable transparent market the fair value is very close, or equivalent, to the market value, because investors will react quickly to new information which eliminates any price discrepancies equally as fast. Market values provide a basis for the fair valuations given the present economic conditions. By using market-dictated rates instead of historical cost the values determined are much more relevant to investors and regulators, which is the main objective of improving reporting standards.

d) Under real conditions, present value calculations are considered to be of low reliability since they are unable to ensure a faithful representation of any future expected cash flows. Present valuations are still decision-useful, since they provide an accurate representation of the current economic reality, and can be useful for short-term