Ch 1 HW Answer Key - 1. Lanni Products is a start-up...

Ch 1 HW Answer Key
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1. Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $23,000 and has cash on hand of $26,000 contributed by Lanni's owners. For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction? a. Lanni takes out a bank loan. It receives $34,000 in cash and signs a note promising to pay back the loan over 3 years. The bank loan is a financial liability for Lanni. Lanni's IOU is the bank's financial asset. The cash Lanni receives is a financial asset. The financial asset created is Lanni's promissory note (that is, Lanni’s IOU to the bank). b. Lanni uses the cash from the bank plus $26,000 of its own funds to finance the development of new financial planning software. Lanni transfers financial asset (cash) to the software developer. In return, Lanni gets a real asset , the completed software. No financial assets are created or destroyed; cash is simply transferred from one party to another. c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 1,750 shares of Microsoft stock. Lanni gives the real asset, to Microsoft in exchange for a financial asset, 1,750 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial asset. d. Lanni sells the shares of stock for $48 per share and uses part of the proceeds to pay off the bank loan. Lanni exchanges one financial asset (1,750 shares of stock) for another ($84,000). Lanni gives a financial asset ($34,000 cash) to the bank and the bank reduces the financial asset (its IOU). The loan is destroyed in the transaction, since it is retired when paid off and no longer exists. 2. Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,500 and has cash on hand of $19,000 contributed by Lanni's owners. Lanni takes out a bank loan. It receives $49,000 in cash and signs a note promising to pay back the loan over 3 years. a-
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