c) (3 pts.) Based on this Balance Sheet, what is the Current Ratio on 1/1/2010?

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1 AAE 320 Spring 2010 Exam #2 Name: 1) (16 pts. total) a) (5 pts.) Use the information given and your knowledge of the relationships among Balance Sheet entries to fill in the five missing cells and then answer the questions below. BALANCE SHEET 1/1/2010 1/1/2009 1/1/2010 1/1/2009 Current Assets 280, ,000 Current Liabilities 250,000 empty Non-Current Assets empty 550,000 Non-Current Liabilities empty 370,000 Total Liabilities 570, ,000 Equity 270,000 empty Total Assets 840,000 empty Total Liabilities & Equity 840, ,000 b) (5 pts.) Briefly define each of the Balance Sheet terms below and give one specific farm/agricultural example for the first four: i) Current Asset: ii) Non-Current Asset: iii) Current Liability: iv) Non-Current Liability: v) Equity (no example needed): c) (3 pts.) Based on this Balance Sheet, what is the Current Ratio on 1/1/2010? d) (3 pts.) Based on this Balance Sheet, what is the Debt to Asset Ratio on 1/1/2010?

2 2) (16 pts. total) Below is a simplified farm Income Statement. a) (3 pts.) Use the given information and your knowledge of the relationships among Income Statement entries to fill in the three missing cells. INCOME STATEMENT 1/1/2009 to 1/1/2010 Crop Sales 200,000 Livestock/Dairy Sales empty Total Revenue 380,000 Operating Costs empty Interest Expenses 50,000 Total Costs 270,000 Net Farm Income from Operations empty Unpaid Labor and Management 50,000 Net Farm Income 60,000 Use the Income Statement above and the Balance Sheet in Question 1 to answer the questions below. Show how you calculate your answers for potential partial credit. b) (5 pts.) What is this farm s Return on Assets? What is this farm s Rate of Return on Assets? c) (5 pts.) What is this farm s Return on Equity? What is this farm s Rate of Return on Equity? d) (3 pts.) What is this farm s Operating Profit Margin Ratio (i.e. Profit Margin)?

3 3) (11 pts. total) Briefly and concisely answer each question below. a) (3 pts.) Explain what the Current Ratio is and why it is important to a farm or business. b) (5 pts.) Explain what the Rate of Return on Assets and the Rate of Return on Equity are and why they are important for a farm or business. c) (3 pts.) Suppose a farm s debt to asset ratio decreased in each of the last 3 years and the farm s income statement showed that the farm business had high net farm incomes. Give an explanation of how this could happen and why it is or is not a problem.

4 4) (10 pts. total) You buy a truck for $40,000 with a useful life of 4 years and no salvage value. a) (3 pts.) Fill in this table using Straight Line Depreciation. Show your work. Year Depreciation During Year Basis at Year End b) (4 pts.) Fill in this table using Double Declining Balance Depreciation. Show your work. Year Depreciation During Year Basis at Year End c) (3 pts.) Calculate depreciation for this truck to claim for income tax purposes for year 3 and year 4 using the following tax table for a 7-year recovery period and the half-year convention. Show your work Depreciation Year Rate % % % % % % % %

5 5) (20 pts. total) Provide short answers to each of the following questions. Ma and Pa own a farm, with all assets owned as marital property under Wisconsin s marital property law. Among their assets is stored corn currently worth $100,000 with a zero income tax basis because they raised the corn and deducted all the costs of raising it. Use this information to answer each question below. Give a brief explanation for each answer. a) (3 pts.) If Ma and Pa gave the corn to Girl and she sold it the next day, how much income would Girl have to report as a result of the sale? b) (3 pts.) If Ma died and Pa gave the corn to Girl, how much income would Girl have to report if she sold it the next day for the same value? c) (3 pts.) If Ma and Pa contributed the corn to an LLC in exchange for an ownership interest in the LLC and the LLC sold the corn the next day, how much income would the LLC realize? i) (2 pts.) If the LLC has income from the sale, does it pay income tax on that income? ii) (2 pts.) If instead the LLC returned the corn back to Ma and Pa before the corn was sold, would the LLC and/or Ma and Pad have to pay income tax as a result of this transfer?

6 d) (3 pts.) If Ma and Pa contributed the corn to an S-Corporation in exchange for shares in the S- Corporation and the S-Corporation sold the corn the next day, how much income would the S- Corporation realize? i) (2 pts.) If the S-Corporation has income from the sale does it pay income tax on that income? ii) (2 pts.) If instead the S-Corporation returned the corn back to Ma and Pa before the corn was sold, would the S-Corporation and/or Ma and Pa have to pay income tax as a result of this transfer? 6) (3 pts.) This problem continues the ongoing saga of Ma, Pa, and Girl. Ma and Pa own all assets as marital property under Wisconsin s marital property law. Ma and Pa bought land years ago for $50,000. Ma dies and the next day Pa sells the land to Girl at its fair market value of $400,000. How much taxable gain does Pa realize from this land sale? 7) (3 pts.) Which of the business entities discussed in class provide some limited liability to the owners of the entity?

7 8 a) (3 pts.) Your Mom wants to invest $10,000 in your farm, with you paying 3% interest compounded annually. How much will you owe in 5 years if you pay her $10,000 plus interest? 8 b) (3 pts.) How much money must be invested today earning a 5% interest rate compounded annually to have $100,000 in 10 years? 8 c) (3 pts.) Shares in a biodiesel plant sell for $1,000 today and will be worth $2,000 in 8 years. What is the rate of return expressed as an annually compounded interest rate? 9 a) (9 pts.) What is the net present value (NPV) for a berry patch that costs $1,000 to plant in year 1, then generates a net return of $1,500 in year 2, $4,000 in year 3, and $1,000 in year 4, assuming a 12% discount rate? As part of your calculations, fill in the Present Value column in the table below. Show your work for potential partial credit. Year Net Return Present Value 1 1, , , ,000 NPV 9 b) (3 pts.) What is the annuity equivalent to the time varying returns from the berry patch? 1 1 The annuity factor formula is K = 1 t r (1 + r), so that the annuity is A = NPV/K.