Bangor Ltd operates under ideal conditions of uncertainty. On January 1, 2022, the company acquired an asset to be used in its operations. Its cash flows depend on the market conditions. The asset will last three years, at which time its salvage value will be £200. The company financed the asset purchase by issuing ordinary shares. In 2022, net cash flows will be £1600 if the market conditions are favourable and £700 if they are unfavourable. In 2023, cash flows will be £1800 if the market conditions are favourable, and £600 if they are unfavourable. In 2024, cash flows will be £2200 if the market conditions are favourable, and £900 if they are unfavourable. Cash flows are received at year-end. In 2022, the probability that the market conditions are favourable is 0.4 and 0.6 that they are unfavourable. In 2023 and 2024, the probability that the economic conditions are favourable is 0.7 and 0.3 that they are unfavourable. The interest rate in the economy is 9% in all three years. The company pays a dividend of £150 at the end of 2022. 5 In 2022, the market conditions are favourable. The market conditions for 2023 and 2024 are not yet known. Prepare a statement of financial position (balance sheet) as at the end of 2022 and a statement of income for 2022.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Bangor Ltd operates under ideal conditions of uncertainty. On January 1, 2022, the company acquired an asset to be used in its operations. Its cash flows depend on the market conditions. The asset will last three years, at which time its salvage value will be £200. The company financed the asset purchase by issuing ordinary shares. In 2022, net cash flows will be £1600 if the market conditions are favourable and £700 if they are unfavourable. In 2023, cash flows will be £1800 if the market conditions are favourable, and £600 if they are unfavourable. In 2024, cash flows will be £2200 if the market conditions are favourable, and £900 if they are unfavourable. Cash flows are received at year-end. In 2022, the probability that the market conditions are favourable is 0.4 and 0.6 that they are unfavourable. In 2023 and 2024, the probability that the economic conditions are favourable is 0.7 and 0.3 that they are unfavourable. The interest rate in the economy is 9% in all three years. The company pays a dividend of £150 at the end of 2022.
5
In 2022, the market conditions are favourable. The market conditions for 2023 and 2024 are not yet known. Prepare a statement of financial position (balance sheet) as at the end of 2022 and a statement of income for 2022.

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