Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $4.9 million. The machinery can be sold to the Romulans today for $7.1 million. Klingon’s current balance sheet shows net fixed assets of $3.7 million, current liabilities of $800,000, and net working capital of $139,000. If all the current assets were liquidated today, the company would receive $915,000 cash. (Enter your answer as directed, but do not round intermediate calculations.)
Requirement 1:
What is the book value of Klingon’s total assets today? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Total asset book value $
Requirement 2:
What is the market value of Klingon’s total assets? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567.)
Total asset market value $
The Correct Answer and Explanation is :
Solution Explanation
Requirement 1: Book Value of Total Assets
The book value of Klingon Widgets, Inc.’s total assets is calculated as:
[
\text{Total Assets (Book Value)} = \text{Net Fixed Assets} + \text{Net Working Capital} + \text{Current Liabilities}
]
[
= 3,700,000 + 139,000 + 800,000
]
[
= 4,639,000
]
So, the book value of total assets is $4,639,000.
Requirement 2: Market Value of Total Assets
The market value of the total assets considers the market value of the fixed assets (machinery) and the actual liquidation value of current assets:
[
\text{Total Assets (Market Value)} = \text{Market Value of Fixed Assets} + \text{Market Value of Current Assets}
]
[
= 7,100,000 + 915,000
]
[
= 8,015,000
]
So, the market value of total assets is $8,015,000.
Explanation
- The book value reflects the historical cost of assets minus depreciation, while the market value reflects what the assets can actually be sold for today.
- The net fixed assets have depreciated on the books to $3.7 million, but the machinery has appreciated in market value and can be sold for $7.1 million.
- The company has $915,000 in current assets based on liquidation, whereas the book value of current assets is $800,000 (liabilities) + $139,000 (working capital) = $939,000.
- The significant difference between book and market values highlights the appreciation of fixed assets and differences in working capital.
Now, I will generate an image representing this financial breakdown.
Here is a financial analysis chart comparing the book value and market value of Klingon Widgets, Inc.’s total assets. Let me know if you need any modifications or further insights!