Question

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $27,000 and has cash on hand of $22,000 contributed by Lanni’s owners.

For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction?

Lanni takes out a bank loan. It receives $38,000 in cash and signs a note promising to pay back the loan over 3 years

The bank loan is a (Click to select)financial liabilityreal assetreal liabilityfinancial asset for Lanni, and a (Click to select)real assetfinancial liabilityreal liabilityfinancial asset for the bank. The cash Lanni receives is a (Click to select)real liabilityfinancial assetreal assetfinancial liability . The new financial asset (Click to select)destroyedcreated is Lanni's promissory note to repay the loan.

b. Lanni uses the cash from the bank plus $22,000 of its own funds to finance the development of new financial planning software.

Lanni transfers (Click to select)real assetsreal liabilityfinancial assetsfinancial liability (cash) to the software developers. In return, Lanni receives the completed software package, which is a (Click to select)financial assetreal assetreal liabilityfinancial liability .

c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 1,550 shares of Microsoft stock.

Lanni exchanges the (Click to select)real assetfinancial liabilityreal liabilityfinancial asset (the software) for a (Click to select)financial liabilityreal assetreal liabilityfinancial asset , which is 1,550 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new (Click to select)financial liabilityreal assetsfinancial assetsreal liability .

d. Lanni sells the shares of stock for $56 per share and uses part of the proceeds to pay off the bank loan.

By selling its shares in Microsoft, Lanni exchanges one (Click to select)real assetfinancial assetreal liabilityfinancial liability (1,550 shares of stock) for another ($86,800 in cash). Lanni uses the (Click to select)real assetfinancial liabilityfinancial assetreal liability of $38,000 in cash to repay the bank and retire its promissory note. The bank must return its (Click to select)real liabilityreal assetfinancial liabilityfinancial asset to Lanni. The loan is (Click to select)destroyedcreated in the transaction, since it is retired when paid off and no longer exists

Answer 1

The answers of the options are as follows:

a) The bank loan is a financial liability for Lanni, and a financial asset for the bank. The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note to repay the loan.

b) Lanni transfers financial assets (cash) to the software developers. In return, Lanni receives the completed software package, which is a real asset.

c) Lanni exchanges the real asset (the software) for a financial asset, which is 1,550 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial liability (for Microsoft).

d) By selling its shares in Microsoft, Lanni exchanges one financial asset (1,550 shares of stock) for another ($86,800 in cash). Lanni uses the financial asset of $38,000 in cash to repay the bank and retire its promissory note. The bank must return its financial assets to Lanni. The loan is destroyed in the transaction, since it is retired when paid off and no longer exists