Question

consider P. Ltd, a one-asset firm with no liabilities. Assume that the asset will generate end-of-year cash flows of $100 each year for three years and then will have zero value. The interest rate in the economy is 10%.

Question: 1.prepare the b/s, and i/s for year 1, year2, and year 3.

2. if the firm has one more asset. the asset will generate end of year cash flows of $200 each year for three years and then will have zero value. the interest rate in the economy is 10%, prepare the b/s, and i/s for year 1, year2, and year 3.

Answer 1

Solution:

Income Statement
Year 2		Amount ($)
Revenue		0.00
Cost of goods sold		0.00
Gross profit/(Loss)		0.00
Other Income
Interest received		110
Net Income		110
Balance sheet
Year 2
Assets		Liabilities
Current Assets:		Current Liabilities	0.00
Cash	210	Long term liability	0.00
Fixed assets	0.00	Total Liability	0.00
		Shareholder's equity
		Retained Earning	210
		Total Shareholder's Equity	210
Total Assets	210	Total Liability and Equity	210
Assumed Cash received is in the nature of interest and firm is not dealing in interest earning activities.
Working:
Cash received at year end 1 (Interest)		100
Interest received in year 2 on beginning year 1 cash		10
(100*10%)
Cash received at year 2 (Interest)		100
Total Cash at year end 2		210