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.