Lanni Products is a start-up computer software development firm. It currently ow

Question

Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth $30,000 and has cash on hand of $20,000 contributed by Lanni’s owners. For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction?

a. Lanni takes out a bank loan. It receives $50,000 in cash and signs a note promising to pay back the loan over three years.

b. Lanni uses the cash from the bank plus $20,000 of its own funds to finance the development of new financial planning software.

c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 2,500 shares of Microsoft stock.

d. Lanni sells the shares of stock for $50 per share and uses part of the proceeds to pay off the bank loan.

Explanation / Answer

a). The bank loan is a financial liability or debt for Lanni. Lanni's IOU is a new financial asset for the bank. The cash Lanni receives is also a financial asset

b). Lanni transfers the financial asset (cash) to the software developers. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed; cash is simply transferred from one party to another.

c). Lanni gives the real asset (the software) to Microsoft in exchange for a financial asset, 2,500 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial assets and dilute the ownership stake of Microsoft’s existing shareholders.

d). Lanni exchanges one financial asset (2,500 shares of stock) for another ($125,000 in cash). Lanni gives a financial asset ($50,000 cash) to the bank and ends a financial asset (its IOU to the bank). The loan is "destroyed" in the transaction, since it is retired when paid off.

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.