Question

In: Accounting

Joe’s Tree Service bought new machines 3 years ago for $600,000. The machines can be sold...

Joe’s Tree Service bought new machines 3 years ago for $600,000. The machines can be sold today to his brother’s company Sam’s Tree Service for $430,000. Joe’s current statement of financial position show next fixed assets of $380,000, current liabilities of $720,000, and net working capital of $250,000. If all Joe’s assets were liquidated today he would receive $1M.

a. What is the book value of Joe’s company?

b. What is the market value of Joe’s company?

SHOW YOUR WORK.

Solutions

Expert Solution

In the given case the fair value of Joe's machines are $430000

Joe has other fixed assets = $380000

Current liabilities = $720000

Net working capital = $250000

Market value of Joe's assets = $1000000

A. Book value of Joe's company :-

Particulars Amount ($) Amount ($)
Value of machinery 430000 600000
Other fixed assets 380000 380000
Less :- current liabilities (720000) (720000)
Less :- net working capital (250000) (250000)
Net book value of company -160000 10000

Net book value of company = -160000 or 10000

If we take the book value of the 3 machines then net book value of company = $10000

If we take the market value of the 3 machines then book value of company = -$160000

in many of the cases fair market value of the machines will be considered for the calculation of the value of the company, but in this case if we take the fair value of the machines the net book value of the company is becoming negative.

So, it is suggestible to take the book value of the machines and keep the net book value of the company in positive terms.

B. Market value of Joe's company :-

Particulars Amount ($)
Market value of assets 1000000
Less :- current liabilities (720000)
Les :- net working capital (250000)
Net market value of company 30000

Net market value of company = $30000

These are all the information required to solve the above given question.

If there is any clarifications required regarding the above provided answer, please mention them in comment box.

I hope, all the above provided information and calculations are useful and helpful to you.

Thank you.

ekkarill92 answered 1 year ago
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