2. There are three valuation methods that reflect historical values: acquisition cost,
adjusted acquisition cost, and present value of cash flows using historical interest rates.
For each of these three methods discuss:
a. Please explain what each of the valuations mentioned above represents. Provide
an example of a balance sheet item that is valued by each method.
b. Describe the advantages and disadvantages of each method.
Acquisition cost valuation method
In this method the cost of Assets are recorded which has been paid initially at the time of
purchased. Acquisition cost is the original monetary value of an asset which has been paid at the
beginning. For this method, cost that are required for incurring the assets like legal fees,
commission, sales tax, shipping, repair and maintenance and others are also added on the original
value at the time of recorded but cost to operate asset is not include (Wahlen, Baginski &
Bradshaw, 2018). So sum of purchase price of assets and cost incurred for acquiring the assets
are recorded in balance sheet of financial statement of the buyer. So no value are being changed
till the date even though actual valuation on market has some other value of that assets. The main
advantage of this valuation method is it is simple and reliable and more importantly, company
don’t have to depend on volatile market price. But the company will never realize actual profit or
loss of the assets unless market valuation of that asset. So it might show unrealistic profit or loss.
For example: If a company buy land of Rs. 1,00,00,000.00 and spend 500,000.00 for other
charges like commission, legal fees, and others. So now company will record Rs. 1,05,00,000.00
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/
adjusted acquisition cost, and present value of cash flows using historical interest rates.
For each of these three methods discuss:
a. Please explain what each of the valuations mentioned above represents. Provide
an example of a balance sheet item that is valued by each method.
b. Describe the advantages and disadvantages of each method.
Acquisition cost valuation method
In this method the cost of Assets are recorded which has been paid initially at the time of
purchased. Acquisition cost is the original monetary value of an asset which has been paid at the
beginning. For this method, cost that are required for incurring the assets like legal fees,
commission, sales tax, shipping, repair and maintenance and others are also added on the original
value at the time of recorded but cost to operate asset is not include (Wahlen, Baginski &
Bradshaw, 2018). So sum of purchase price of assets and cost incurred for acquiring the assets
are recorded in balance sheet of financial statement of the buyer. So no value are being changed
till the date even though actual valuation on market has some other value of that assets. The main
advantage of this valuation method is it is simple and reliable and more importantly, company
don’t have to depend on volatile market price. But the company will never realize actual profit or
loss of the assets unless market valuation of that asset. So it might show unrealistic profit or loss.
For example: If a company buy land of Rs. 1,00,00,000.00 and spend 500,000.00 for other
charges like commission, legal fees, and others. So now company will record Rs. 1,05,00,000.00
-
/
