Palomar Paper Products purchased land in 1990 for $15,000 cash. The company has held the land since that time. In 2008 Palomar purchased another tract of land for $15,000 cash. Assume that prices in general increases by 60 percent from 1990 to 2008.
a. Assuming that Palomar made only these two land purchases, what dollar amount would appear in the land account on Palomar’s balance sheet as of December 31, 2008?
b. Palomar used $15,000 cash to make each land purchase. Would $15,000 in 1990 buy the same amount of goods and services as $15,000 in 2008? If not, how much more or less, and why?
b. Palomar used $15,000 cash to make each land purchase. Would $15,000 in 1990 buy the same amount of goods and services as $15,000 in 2008? If not, how much more or less, and why?
If you were trying to "cut and paste" it rarely works here. You will need to type it all out.
Sra
Answer a
$30,000 amount would appear in the land account on Palomar's balance sheet as of December 31, 2014.
Answer b
Palomar used $15,000 cash to make each land purchase. No, it Would not $15,000 in 1996 buy the same amount of goods and services as $15,000 in 2014. As Prices in general increased by 60% from 1996 to 2014. The price of Land purchased in 1996 $15,000, but it price in 2014 would be $15,000 * 1.60 = $24,000
Answer C
If the stable dollar assumption were dropped it would affect the company income statement. Palomar Company’s land was a total of 30,000 for both lands but now the cost of both lands together has dropped to $24,000 meaning the company has loss $6,000 ($30,000-$24,000).
To answer question (a), we need to calculate the historical cost of each land purchase and then determine the total dollar amount that would appear in the land account on Palomar's balance sheet as of December 31, 2008.
1. First, let's calculate the historical cost of the land purchased in 1990. Since the land was purchased for $15,000 cash in 1990 and prices increased by 60% from 1990 to 2008, we need to adjust the purchase price.
Increase in price = $15,000 * 60% = $9,000
Adjusted purchase price = $15,000 + $9,000 = $24,000
Therefore, the historical cost of the land purchased in 1990 would be $24,000.
2. Now, let's calculate the historical cost of the land purchased in 2008. The land was purchased for $15,000 cash in 2008, so there is no adjustment needed.
Therefore, the historical cost of the land purchased in 2008 would be $15,000.
3. Finally, to determine the total dollar amount that would appear in the land account on Palomar's balance sheet as of December 31, 2008, we simply need to add the historical costs of both land purchases.
Total land account balance = Historical cost of land purchased in 1990 + Historical cost of land purchased in 2008
= $24,000 + $15,000
= $39,000
Therefore, the dollar amount that would appear in the land account on Palomar's balance sheet as of December 31, 2008, would be $39,000.
Moving on to question (b), we are asked if $15,000 in 1990 would buy the same amount of goods and services as $15,000 in 2008. The answer is no, because prices in general increased by 60% from 1990 to 2008.
To calculate how much $15,000 in 1990 would be worth in 2008, we need to adjust it for the inflation rate of 60%.
Inflation-adjusted value = $15,000 + ($15,000 * 60%)
= $15,000 + $9,000
= $24,000
Therefore, $15,000 in 1990 would have approximately the same purchasing power as $24,000 in 2008. This means that $15,000 in 1990 would buy fewer goods and services compared to $15,000 in 2008 due to inflation.