Question

Klingon Cruisers, Inc., purchased new cloaking machinery five years ago for $20 million. The machinery can be sold to the Romulans today for $18 million. Klingon's current balance sheet shows net fixed assets of $15.5 million, current liabilities of $700,000, and net working capital of $226,000. If all the current assets were liquidated today, the company would receive $1.08 million cash.
1. What is the book value of Klingon's assets today? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
2. What is the market value? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)

Answer 1

Answer:

1) Book Value= $16,464,000

2) Market Value = $19,080,000

Explanation:

The first question is to determine the book value of Klingon's assets today. Book value is the carrying value of the business in its balance sheet.

Book Value = Net working Capital + Current Liabilities + Net Fixed Assets

Net working Capital= $226,000

Current Liabilities= $700,000

Net Fixed Assets= $15,500,000

Book Value = $226,000+ $700,000+$15,500,000= $16,464,000

2) Calculate the market value

The formula for market value = How much the machinery was sold to Romulans today+ today's value of the current assets if they are liquidated

The market value of assets is a function of the current market price they can be sold for and received on the day of the valuation

Market Value= $18,000,000 + $1,080,000= $19,080,000