Chapter 9 - Solution Manual

B accountants believe that cost allocation provides

Info icon This preview shows pages 12–14. Sign up to view the full content.

b. Accountants believe that cost allocation provides relevant information because it attempts to match cost with revenue and thus provides measures of performance. On the other hand, all allocation schemes are by their very nature arbitrary. As such, they are not objective. Also, one could argue that cash flow is all that matters with regard to fixed assets. In other words, purchasing a fixed asset is an investing activity, a cash outflows. It is not an operating activity. It provides physical assets to generate revenue, but it is a sunk cost and does not recur on an annual basis. c. If the purpose of the balance sheet is to disclose resources and claims to resources, historical cost once the asset has been purchased may no longer be relevant. Historical cost does not provide a measure of the current value of the asset in use. Each period the company in effect makes a conscious decision to keep the asset. These decisions imply that the company is, in effect, reinvesting in the asset. Reinvestment decisions are made based on replacement cost. Hence, replacement cost would provide relevant measures of fixed assets. d. Yes, a current value approach to the valuation of fixed assets would be consistent with the physical capital maintenance concept. The concept of physical capital maintenance is concerned with maintaining productive capacity, the operating assets of the entity. Assets must eventually be replaced in order to maintain the current level of productive capacity. Hence, measurement of assets at their replacement cost, a current cost measure, is consistent with the physical capital maintenance concept. e. The major problems associated with use of replacement cost relate to determining the amount of replacement cost. Once purchased, the replacement cost of fixed assets may be difficult if not practically impossible to determine. Replacement cost is the cost to replace the assets with similar assets in similar condition. But, there may be no ready market for the assets. In these cases it may be necessary to obtain appraisal values in order to approximate replacement cost. In some cases specific price indexes may be used, but these measures provide reasonably approximations only when the price of the asset being measured moves in the same way as the movement of the price index. Moreover, relevance of replacement cost may be questionable. It can be argued that entry values are relevant only when purchase is contemplated. For owned assets replacement cost may be irrelevant because these assets will either be used or sold. Hence, a better measure of current value may be net realizable value. FASB ASC 9-1 Depreciation
Image of page 12

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

179 FASB ASC 360-10-35 Found by searching “depreciation and property, plant and equipment” or by accessing the Assets link and selecting Property, plant and equipment, overall. Specifically, the definition of depreciation is contained in FASB ASC 350-10-35-4.
Image of page 13
Image of page 14
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern