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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Valuation of Assets and Stock

A friend has come to you for advice. He states that he owns several shares of stock in a corporation. He has examined the most recent balance sheet of the corporation and has found that the common stock issued and outstanding totals 40,000 shares, and the market price per share is $25 on the balance sheet date. He is sure that the balance sheet must be in error because, in his words, “the total assets are $1,100,000 and this current value should be the same as the $1,000,000 total value of the outstanding common stock.”

Required:

Explain to your friend how the “values” of the various assets of the corporation typically are measured and reported on its balance sheet, and how the “value” of the $1,100,000 total assets is determined. Continue the discussion by explaining to your friend why the “values” of the assets and the stock are not the same.

To determine

Explain the reason for which the “values” of the assets and the stock are not the same.

Explanation

Historical Cost:

The historical cost is a measure of value which states that, each and every item should be recorded at its original cost (purchased value), on the balance sheet of the Company.

  • Historical cost is also known as acquisition cost as it is the amount that is paid initially to acquire the asset. The assets’ cost is measured by the cash paid for the asset, or if it is a case of noncash exchange, the estimate is made depending upon the cash equivalent of the noncash asset exchanged.
  • Non-financial assets and liabilities of the company are evaluated by the company at its historical cost. Usually, assets are stated at exchange price of the transaction at which the assets are acquired. In general, this exchange price is recorded in the company’s balance sheet unless another exchange takes place.
  • Certain alterations can be made to this general rule for nonfinancial assets. Consequently, financial assets and liabilities can be stated at fair value in the company’s balance sheet

Specific assets and their valuation are reported below:

AssetsValuation
CashMonetary value
Temporary investmentsFair value
Marketable securitiesFair value
ReceivablesNet realizable value
InventoriesHistorical cost or market value (lower)
Prepaid itemsHistorical cost, less amortized amount, if any
Long-term investmentsEither at fair value, historical cost, or book v...

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