In a given period, the firm's beginning gross investment is 6,000 and ending gross investment is 10,000. The accumulated depreciation at the beginning was 500 and the ending balance in this account was 1,500. The firm uses straight-line depreciation. Then, the average depreciable life of the firm's assets is ________.
Answer(s): C
Note that: Average depreciable life = Ending Gross Investment/Depreciation expense. Depreciation expense = 1,500-500 = 1,000. Hence, ADL = 10,000/1,000 = 10 years.
Firm A uses Double Declining and Firm B uses Sum-of-digits method of depreciation. In the first year, which of the following is/are TRUE?
Answer(s): B
Double Declining results in a higher depreciation in the first year. Therefore, Firm A shows lower assets, lower income and hence lower equity in the first year. Thus, its debt-to-equity and debt-to- asset ratios are higher than B's.
If the net cash inflow = $12,000, Investing cash flow = $(4,000) and operating cash flow = $7,000, the financing cash flow equals ________.
Answer(s): A
financing cash flow = 12,000 - (-4,000) - 7,000 = $9,000
An end-of-period adjustment for depreciation of fixed assets involves an entry to an expense and
An adjustment for depreciation expense matches expenses with revenues for the period. An expense is incurred and the asset is reduced by increasing the contra account.
Morgan Inc. was organized on January 2, 1997 with the following capital structure:10% cumulative preferred stock, par value $100 and liquidation value $105; authorized, issued and outstanding 1,000 shares, $100,000Common stock, par value $25; authorized 100,000 shares;Issued and outstanding 10,000 shares, $250,000Morgan had net income of $450,000 for its first year, but no dividends were declared. How much was Morgan's book value per common share at December 31, 1997?
The book value per share of cumulative preferred stock is its liquidation value plus any dividends in arrears.Thus, the book value per preferred share is the $105 liquidation value plus $10 ($100 X 10%) of dividends in arrears, or $115. The total book value for preferred shares is $115,000 ($115 X 1000). The total book value of the company is $800,000 ($100,000 par value of preferred stock + $250,000 par value of common stock + retained earnings equal to $450,000 of net income). Hence, $685,000 ($800,000-115,000) is the book value of the common stock, and book value per common share is $68.50 ($685,000 / 10,000 shares).
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