Question

Consider X, a one -asset firm with no liabilities. Assume that the asset will generate end-of the year cash flows of $200 each year for two years and the will have zero value. The interest in the economy is 10%.

1-Prepare the income statement for year 2

2-Do we need I/S if the discount rate and future cash flows are certain? Why? What information should be on the income statement if we can not get the certainty condition?

3-Prepare the balance sheet at the end of year 2 for the company. The company pays no dividends.

Answer 1

1)

Company X

Income Statement for the year ended year2

Particulars

Amount($)

Amount($)

Revenue:

Gross Sales

200.00

Less: Sales Returns and Allowances.

-

Cost of Goods Sold:

Materials

-

Other Direct Expenses

-

Gross Profit(Loss)

Other Income:

Discount Received

-

Rental income

-

Gain (Loss) on sale of Assets

-

Interest Received

-

Gross income

200.00

Expenses:

Advertising

-

Amortisation

-

(Assets details if given, then depreciation will be calculated)

Bad Debt

-

Bank Charges

-

Wages

-

Other Expenses

-

Total Expenses

-

Net Operating Income

200.00

2) Yes, because as per IAS 18 "Revenue Recognition", Revenue should be recognised in the income statement if an item that meets the definition of revenue when it meets the following criteria:

a) it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and

b) the amount of revenue can be measured with reliability.

Second Part: if we cannot get the certainty conditon of income fulfilled as per IAS 18, then Income is not recognised in the Income Statement. the Financial Statement for it. A nil/zero income will be shown in the income statement.

3)

Company X

BALANCE SHEET AS AT 31ST SEPTEMBER 20XX

L I A B I L I T I E S

A M O U N T

A S S E T S

A M O U N T

Rs.

Rs.

Share Capital

-

Fixed Asset

Reserve & Surplus

200.00

Asset1

-

Long Term Liabilities

-

Investment

-

Current liabilities

-

Current assets:

Cash

200.00

Total

200.00

Total

200.00