Question

what is fair market value.

Answer 1

This is the amount of an asset which could be received by the seller if it is sold in the market currently. It is the true valuation of the property, although there might be different valuation of the asset in the entity’s book.

Example: Suppose a machine was purchased in 2015 for $50,000. It has 10 years life and having no salvage value at the end of the life.

The amount of depreciation in each year = (Cost / Life years)

                                                                        = $50,000 / 10

                                                                        = $5,000

Now this is the year 2018. We have to calculate the book value of asset and have to search the fair value.

Solution: Book value at the end of 2018 = Cost – Accumulated depreciation for 4 years

                                                                   = 50,000 – ($5,000 × 4)

                                                                   = 50,000 – 20,000

                                                                   = $30,000

The fair value in today’s date is $36,000 (assumed).

It indicates that if the machine is sold today, there will be a profit of (36,000 – 30,000 =) $6,000.