Crawford Company Conducts a Lottery System for Mississippi A If the Market Rate of Interest Is 4%, Determine

Essay

Crawford Company conducts a lottery system for Mississippi. The agreement specifies that the lottery must be conducted on a not-for-profit basis. Crawford's monthly sales of lottery tickets amounts to $1,400,000. Monthly operating expenses are $400,000, including a management charge of $30,000. The payment schedule for the guaranteed $1 million dollar payout for a winning lottery ticket is $100,000 immediately and $100,000 each year for the next 9 years. Crawford produced the following income statement as evidence of its not-for-profit status:
$\begin{array}{lrr}\text { Ticket sales } & & \$ 1,400,000 \\\text { Expenses: } & & \\\quad \text { Payout expense } & \$ 1,000,000 & \\\text { Operating expenses } & \underline{400,000} & \underline{1,400,000} \\\text { Net income } & &\underline{ \$ \quad 0}\end{array}$
A. If the market rate of interest is 4%, determine the present value of the $900,000 liability arising from the monthly winning lottery ticket.
B. Recalculate the income statement to reflect GAAP measurement of payout expense.