In Chapter 7, you learned and discussed bad debts as assets. This week you are e
ID: 2501895 • Letter: I
Question
In Chapter 7, you learned and discussed bad debts as assets. This week you are exploring ways to account for tangible and intangible assets. Assume you are an assistant controller for a company. While you are preparing quarterly budget figures, it occurs to you that there are no residual values for the long-lived assets. You discuss this with the division director and he has specified that assets be given a residual value of zero. The director believes that estimates are “accounting magic” and have doubtful value. Although he can accept the estimate of a finite useful life, he believes that the residual is no more than a guess and has no place in his business. “Who knows what they’ll be worth when we’re through with them?” He says that the division always negotiates the best price possible when the assets are replaced, and takes any gain or loss at that time, when a “real” number is available. What should you do? What is a residual value? How is it determined? Why is it subtracted from cost before depreciation expense is calculated?
Explanation / Answer
We are discussing about accounting for tangible and intangible asset where it stands for fixed assets that is held by business for producing goods or services and not for sale during normal course.
Valuation of fixed assets is very important for any organization as it comprised of material value for its total assets and therefore plays significant role in financial position.
Fixed assets are often valued on:
Fair Market Value: It is determined at Arm Length Price in an open and unrestricted market without any compulsion by knowledgeable and willing parties.
Gross Book Value: It is usually reflects historical cost or any amount substituted for it, when this amount is reduced by accumulated depreciation called net book value.
For any organization it is very important to show its fixed assets at fair market value whenever it comes to our knowledge that there is no residual value, it should be reflected in books.
Residual Value of any assets is worth of assets when the life of using it expired, and often determined by the selling value in open market or how much we can fetch from it.
It is subtracted from cost before depreciation because when we sell the asset it generates cash flows equal to its residual value and we depreciate only that value which is used in production of goods and services while in normal due course.