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Frosty Co. Case Study
AFM 291
Ivan Koparan –Student#: 20466021, Section 004
Jyot Vohra – Student#: 20464383, Section 004
Brandon Bacchus – Student#: 20460753, Section 005
Please hand back to Section 004.
1. Capitalizing interest
a. Factory $27,887.44 Interest Expense $27,887.44
b. The avoidable interest is $70,000.
c. Factory $42,112.56 Interest Expense $42,112.56
Income Tax Expense $12,633.77 Income Tax Payable $12,633.77
d. Interest Expense $27,887.44 Factory $27,887.44
Income Tax Payable $8,366.23 Income Tax Expense $8,366.23
e. In part c, net income would increase by $29,478.79. In turn, EPS would increase by about $0.12. In part d, net income would decrease by $19,521.21. In turn, EPS would decrease by about $0.08.
2. a. We need to record the future obligations at their present value. So we can use the PV equations with our IRR as the discount rate to find the present value of the future obligations.
400 000 / (1.12)^20 = 41 466.70
225000/(1.12)^21 = 20825.91
225000/(1.12)^22 = 18594.56
225000/(1.12)^23 = 16602.29
PV of future ARO payments = 41467 + (20826 + 18595 + 16602) = 97490
b. The factory would need to be debited for the present value of the future obligations (i.e $97490) while the liabilities will need to add an account called “Provisions for asset retirement obligation” for the same amount. This will changes total assets and total liabilities.
c. This adjustment will not affect the net income or EPS at all because the transaction is only limited to the balance sheet.
3. a) Historical cost = $825
Current Sales Price = $750
Cost to sell = $60
NRV = Current sales price – cost to sell = $690 per unit
Applying Lower of Cost or
AFM 291
Ivan Koparan –Student#: 20466021, Section 004
Jyot Vohra – Student#: 20464383, Section 004
Brandon Bacchus – Student#: 20460753, Section 005
Please hand back to Section 004.
1. Capitalizing interest
a. Factory $27,887.44 Interest Expense $27,887.44
b. The avoidable interest is $70,000.
c. Factory $42,112.56 Interest Expense $42,112.56
Income Tax Expense $12,633.77 Income Tax Payable $12,633.77
d. Interest Expense $27,887.44 Factory $27,887.44
Income Tax Payable $8,366.23 Income Tax Expense $8,366.23
e. In part c, net income would increase by $29,478.79. In turn, EPS would increase by about $0.12. In part d, net income would decrease by $19,521.21. In turn, EPS would decrease by about $0.08.
2. a. We need to record the future obligations at their present value. So we can use the PV equations with our IRR as the discount rate to find the present value of the future obligations.
400 000 / (1.12)^20 = 41 466.70
225000/(1.12)^21 = 20825.91
225000/(1.12)^22 = 18594.56
225000/(1.12)^23 = 16602.29
PV of future ARO payments = 41467 + (20826 + 18595 + 16602) = 97490
b. The factory would need to be debited for the present value of the future obligations (i.e $97490) while the liabilities will need to add an account called “Provisions for asset retirement obligation” for the same amount. This will changes total assets and total liabilities.
c. This adjustment will not affect the net income or EPS at all because the transaction is only limited to the balance sheet.
3. a) Historical cost = $825
Current Sales Price = $750
Cost to sell = $60
NRV = Current sales price – cost to sell = $690 per unit
Applying Lower of Cost or