Question

Sam Corporation operates under ideal conditions of certainty. It acquired its sole asset (a pen making machine) on January 1, 2018. The asset will yield $500 cash for 2 years at the end of year 2019 and 2020. Salvage value or disposal costs are expected to be zero. The interest rate in the economy is 6%. Purchase of the asset was financed by the issuance of common shares. Flamenco Corporation will pay no dividend at the end of each year.

Required

a.     Prepare a balance sheet and income statement as at the end of December 31, 2019.

Answer 1

Valuation of Machines in the Book of Sam Corporation
Period	Cash Fows	Interest Rate @ 6%	PV Value @ 6%
2019	500	0.9434	472
2020	500	0.8900	445
			917
Depreciation for Machine = Cost of Acquistion - Salvage Value / Useful Life
Assumed to be Useful life of 2 years = 917 - 0 /2
Sam Corporation
Balance Sheet
as on Date 31, Dcember 2019
Equity and Liability	Amount $	Assets	Amount $
Equity		Gross Machine Value	917
Equity Share Capital	917	Less: Accumulated Depreciation	917
Retained Earnings	83	Net Machine Value	NIL
		Account Receiavble	1000
Total	1000	Total	1000
Sam Corporation
Income Statement
for the Year Ended 31 Decemebr 2019
Particulars	Amount $	Particulars	Amount $
Depreciation	458.5	Revenue	500
Net Income	41.5
Total	500	Total	500
Schedule for Retained Earnings
Opening Profit ( 2018)	41.5
Net Income During the Year ( 2017)	41.5
Closing Retianed Earning	83