Required: A manufacturing company holds large amounts of factory machinery on its balance sheet. The machinery...

Required:

A manufacturing company holds large amounts of factory machinery on its balance sheet. The machinery is custom built using specifications that make it unsuitable for use in any other location. For this reason it is unlikely that there could exist a resale market for this machinery.

Discuss:

two advantages of using historical cost to measure this machinery. (2.5 marks)
two advantages of using the revaluation model to measure this machinery. (2.5 marks)

Solutions

Expert Solution

Two advantages of using historical cost to measure this machinery are:

(1): Objectivity and reliability of accounting information – As the machinery is custom build and has no resale market determining its market value will be full of subjectivity and speculations. Using the historical cost method will ensure that valuing the machinery is not clouded with and subjective increase or decrease in its value. This completely removes any scope for manipulation of data as well.

(2): Simplicity and convenience as well as consistency of financial numbers – As the accounting data related to the machinery is recorded at its original amount there will be no need to restate accounting numbers every year. Secondly the accounting figures will be consistent over time and so intra-comparability as well as inter-comparability of accounting figures becomes easier.

Two advantages of using the revaluation model to measure this machinery are:

(1): Realistic depreciation – As the depreciation is based on the revalued amounts it will be more realistic in nature and will be in line with the fair value of the machinery, rather than its historical cost.

(2): More accurate worth of the machinery – The use of revaluation model will give an accurate worth of the machinery even though it does not have a resale market.

ekkarill92 answered 2 years ago

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