Question

Hound Hollow partners. starts its business raising $800,000 in cash and $200,000 in a bond offering. It immediately purchases 4,000 hogs at $100 per hog, purchases 100 acres of land for $300,000, and builds a barn for $250,000. During the year it makes $200,000 of pre-tax profit using accrual accounting. It booked $25,000 of depreciation. Cash at the end of year 2 was 50,000.

Opening balance Sheet

Assets

Cash                                           $50,000

Land                                         $300,000

Barn                                          $250,000

Livestock                                  $400,000

Total Assets                          $1,000,000

Liabilities  Bond                      $200.000

Shareholder equity                 $800,000

At the end of Year 1, The hogs are worth $90 each on the open market. 3.500 hogs are still owned. The land had increased in value by 10% due to favorable market conditions. The replacement cost of the barn remains $250,000. Due to a change in interest rates, the bnd is now worth $180,000.

What is the pre-tax profit using the fair value method of accounting? (Show calculations, not just answer.)

Answer 1

1	Calculation of pre tax profit	amount
	Pre tax profit as per accural accounting	200000
	ADD: upward revaluation of land	30000
	ADD: decrease in share holder equity	20000
	Less: decrease in live stock	-85000
	Pre tax profit as per fair value accounting	165000