P2-5 Market Values and Book Values [LO1] Klingon Widgets, Inc., purchased new cl

Question

P2-5 Market Values and Book Values [LO1] Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $6.9 million. The machinery can be sold to the Romulans today for $4.45 million. Klingon's current balance sheet shows net fixed assets of $3.2 million, current liabilities of $2.2 million, and net working capital of $570,000. If all the current assets were liquidated today, the company would receive $1.55 million cash. Required (a) What is the book value of Klingon's assets today? (Click to select)+ (b) What is the market value? (Click to select)

Explanation / Answer

Book Value:

Net Fixed Assets as per Balance Sheet = 3.2 million, Current Liability = 2.2 million, Net Working Capital = 570000

Net Working Capital = Current Assets - Current Liability

so, 570000 = Current Assets - 2200000

so, Current Assets = 2200000 + 570000 = 2770000

So, Book Value of Klingon's Assets = Book Value of Net Fixed Assets + Book Value of Current Assets
= 3200000 + 2770000 = 5970000 or 5.97 million

Market Value:

Market Value of Machinery (Fixed Asset) = 4.45 million, Market Value of Current Asset = 1.55 million

So, Market Value of Klingon's Assets = 4.45 million + 1.55 million = 6 million

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