Chapter E, Problem 1E

To determine

Indicate the method for valuing each of the following assets.

Answer to Problem 1E

The method for valuing each of the following assets is given below:

Asset	Method of valuation
Buildings	HC/AC
Available-for-Sale Securities	FMV
Office Equipment	HC/AC
Inventory	LCM
Supplies	HC/AC
Land	HC/AC
Trading Securities	FMV
Intangible Assets	HC/AC
Held-to-Maturity Securities	HC/AC

Table (1)

Note: FMV represents fair market value, LCM represents lower of cost or market and HC/AC represents historical cost or amortized cost

Explanation of Solution

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.

Lower of cost or market:

Lower of cost or market is an accounting method for valuing inventory. In this type of method the inventory is recorded at the historical cost or the market value. Historical cost represents the cost at which the time of inventory is purchased. If the price of the inventory falls below the net realizable value, the Company uses the lower of cost or market method to record the loss incurred.

Fair market value:

Fair market value is the current market value of securities and it is the negotiable price agreed between the seller and the buyer that is, the price at which investor (buyer) has to pay to buy the security in an active market. Fair value is generally decided by the market for most of the investments or assets.