The amount of cash given to bush enterprises was 4760

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The Banking Corporation will recognize interest revenue of $240. The amount of cash given to Bush Enterprises was $4,760 and in exchange Banking Corporation received a note receivable for $5,000. The difference is the amount of interest revenue that Banking Corporation will recognize in its books on December 31.b.Banking Corporation is better off at the end of the year than if the company had not invested the $4,760 on January 1. Overall, however, the company is worse off financially on December 31 than on January 1. To purchase the same basket of goods on December 31 as it could purchase for $4,760 on January 1, Banking Corporation would need $5,236 [$4,760 ×(1 + 10%)]. In other words, the company would need an additional $476. By loaning the money to Bush Enterprises during the year, Banking Corporation acquired $240. Hence, during the year the company became economically worse off by $236 ($476 – $240). Just to maintain its purchasing power, Banking Corporation would have to loan money at the inflation rate. To improve its purchasing power, Banking Corporation would have to loan money at a rate that exceeds the inflation rate.c.As indicated in Part (b), Banking Corporation actually lost $236 of purchasing power during the year. On the other hand, Bush Enterprises gained purchasing power during the year. Bush could have invested the $4,760 it borrowed in a basket of goods on January 1. On December 31, Bush could sell the basket of goods for $5,236, repay Banking Corporation $5,000, and still have $236 left over. Consequently, Bush Enterprises ended up with the better deal. Whenever the interest rate on a loan is less than the inflation rate, the borrower has an advantage.Since accountants adhere to the stable dollar assumption, inflation is not reflected in financial statements. Consequently, the financial statements of Banking Corporation would indicate the company is better off by the amount of interest revenue, while the financial statements of Bush Enterprises would indicate the company is worse off by the amount of interest expense.P3–3a.Cash InflowsCash OutflowFutureTotalFrom Salefor ReplacementCash FlowsCash FlowsAsset A:Option 1$1,500$0$0$1,500Option 21,500(1,000)5,0005,500Option 3002,5002,500Asset B:Option 150000500Option 2500(2,000)3,5002,000Option 3002,5002,500Asset C:Option 13,000003,000Option 23,000(3,500)5,0004,500Option 3002,5002,500
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P3–3ConcludedKathy made the correct decision with respect to Assets B and C, but not to Asset A. As demonstrated above, Option 3 (i.e., retaining the asset) yields the highest net cash flows for Asset B. For Asset C, Option 2 (i.e., selling and replacing the asset) yields the highest net cash flows. However, the best option for Asset A is Option 2. If Kathy had selected this option, she would expect to generate a total of $5,500 in net cash inflows, an increase of $3,000 over the net cash inflows that are expected under the option she selected.b.The original cost information should not be used in evaluating Kathy’s decisions. Original costs represent sunk costs, and sunk costs should not be considered in future decisions. In evaluating the performance of a manager, we are interested in the cash flows generated by the

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