Reference no: EM132928103

SAIF Company starts business in year 2019 raising $100 million in cash: $50 million from issuing equity and $50 million from issuing 5% bonds (at par). This company uses the $100 million raised to buy a commercial building on that day, which it rents out for $10 million per year. At the end of Year 2019, the company still owns the commercial building, which is valued at $125 million. Also, the market value of the bonds has fallen to $48.5 million. During Year 2020, the company earns rental income of $7 million due to COVID-19 virus, the commercial building is valued at $110 million at year-end, and the market value of the bonds has increased to $51.5 million. Assume the useful life of the commercial building is 50 years and its salvage value is $75 million. Assume that rental income (interest on bonds) is received (paid) in cash on the last day of the year.

Question 1: What is the net income under historical-cost accounting for year 2019 and 2020, respectively?

Option 1: 34 million, 13 million
Option 2: 8 million, 4.5 million
Option 3: 5 million, 13 million
Option 4: 7 million, 4 million
Option 5: 34 million, -13.5 million

Question 2: What is the net income under fair-value accounting for year 2019 and 2020, respectively?

Option 1: 34 million, 13 million
Option 2: 5 million, -13.5 million
Option 3: 5 million, 13 million
Option 4: 7 million, 4 million
Option 5: 34 million, -13.5 million