CASE – PROPERTY, PLANT &EQUIPMENT Thefollowing is a note accompanying a financia
ID: 2502219 • Letter: C
Question
CASE – PROPERTY, PLANT &EQUIPMENT
Thefollowing is a note accompanying a financial statement ofInternational Paper Company:
Plant, Property, andEquipment
Plant, Properties, and Equipmentare stated at cost less accumulated depreciation. For financialreporting purposes, the company uses the units-of-production methodof depreciating its major pulp and paper mills and certain woodproducts facilities, and the straight-line method for other plansand equipment.
Annual straight-line depreciationrates for financial reporting purposes are as follows:
Fortax purposes, depreciation is computed utilizing acceleratedmethods.
Required:
PROBLEM - INENTORY
Boswell Electric prepared thefollowing condensed income statements for two successiveyears:
Particulars
2008
(Rs.)
2007
(Rs.)
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income
200,000
150,000
50,000
30,000
20,000
160,000
100,000
60,000
20,000
40,000
AtThe end of the year 2007, the inventory was understated by Rs.10,000, but the error was not discovered until after the accountshad been closed and financial statements prepared at the end of theyear 2008. The balance sheets for the two years showedowner’s equity of Rs. 50,000 at the end of the year 2007 andRs. 60,000 at the end of the year 2008. (Boswell is organized as asole-proprietorship and does not incur income taxesexpense.)
Required:
PROBLEM –DECISION MAKING ABOUT LOAN& LEASE
Casso limited has an option topurchase new car for the use from a bank on loan for Rs. 100,000with 16% interest payable annually and the principal is repayablein full at the end of 4 years. Alternatively, the car could beleased for 4 years, with the following terms:
Required:
Find which option is moresuitable for the company.
Particulars
2008
(Rs.)
2007
(Rs.)
Sales
Cost of goods sold
Gross profit on sales
Operating expenses
Net income
200,000
150,000
50,000
30,000
20,000
160,000
100,000
60,000
20,000
40,000
Explanation / Answer
DECISION MAKING ABOUT LOAN & LEASE
Loan Option:
Loan Amount = Rs. 1,00,000
Interest Rate = 16%
Future Value = Rs. 1,16,000
Present Value of the Loan = 1,16,000 / (1+0.10)4
Present Value = 1,16,000 / 1.4641
Leasing Option:
Years
Cashflows
Discount Factor at 10%
Present Value of Cash flows
0
22,000
1
22,000
1
25,000
0.909
22,725
2
25,000
0.826
20,650
3
25,000
0.751
18,775
4
25,000
0.683
17,075
Net Present value of cashflows
1,01,225
Leasing Option:
Years
Cashflows
Discount Factor at 10%
Present Value of Cash flows
0
22,000
1
22,000
1
25,000
0.909
22,725
2
25,000
0.826
20,650
3
25,000
0.751
18,775
4
25,000
0.683
17,075
Net Present value of cashflows
1,01,225
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