Sure corporation operates under ideal conditions of certainty. It acquired its sold asset on January 1, 2015. The asset will yield $600 cash a the end of each year from 2015 to 2017, inclusive, after which it will have no market value and no disposal costs. The interest rate in the economy is 6%. Purchase of the asset was financed by the issuance of common shares. Sure corp will pay a dividend of $50 at the end of 2015 and 2016. Required:
a. Prepare a balance sheet for Sure Corp. at the end of 2015 and an income statement for the year ended December 31, 2015.
b. Prepare a balance sheet for Sure Corp. as at the end of 2016 and an income state- ment for the year ended December 31, 2016.
c. Under ideal conditions, what is the relationship between present value (i. e., value in use) and market value (i. e., fair value)? Why? Under the real conditions in which accountants operate, to what extent do market values provide a way to implement fair value accounting? Explain.
d. Under real conditions, present value calculations tend to be of low reliability. Why? Does this mean that present value-based accounting for assets and liabilities is not decision useful? Explain.
Accounting Under Ideal Conditions 61
Note: In the following two problems, the capital asset is financed in part by means of interest- bearing bonds. This is not illustrated in the text.