Question

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $34,000 and has cash on hand of $12,000 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?

a. Lanni takes out a bank loan. It receives $42,000 in cash and signs a note promising to pay back the loan over 3 years.

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

b. Lanni uses the cash from the bank plus $12,000 of its own funds to finance the development of new financial planning software.

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

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 1,800 shares of Microsoft stock.

Lanni exchanges the   (Click to select)   real liability   financial asset   real asset   financial liability  (the software) for a   (Click to select)   financial asset   financial liability   real liability   real asset  , which is 1,800 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)   real assets   financial liability   real liability   financial assets  .

d. Lanni sells the shares of stock for $35 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)   financial liability   real liability   real asset   financial asset  (1,800 shares of stock) for another ($63,000 in cash). Lanni uses the   (Click to select)   real liability   financial liability   financial asset   real asset  of $42,000 in cash to repay the bank and retire its promissory note. The bank must return its   (Click to select)   real asset   real liability   financial asset   financial liability  to Lanni. The loan is   (Click to select)   destroyed   created  in the transaction, since it is retired when paid off and no longer exists.

Answer 1