Page 38 - DCOM409_CONTEMPORARY_ACCOUNTING

Unit 2: Price Level Accounting

Valuation of Fixed Assets Notes

The fixed assets in the balance sheet are valued at their value to the business, which is defined as
the amount the company will lose if it were deprived of these assets. The value of an asset to the
business could be either of the following:
(a) Replacement Cost Value
(b) Net Realisable Value
(c) Economic Value.

1. Replacement Cost: It refers to the money now required to buy a new asset of the type
similar to the existing asset. The amount of depreciation has also got to be deducted from
the same considering the fact that the true replacement of the asset would not be a new,
asset but an asset that has the same remaining useful life as the existing asset.

Example: Suppose a machine was purchased five years ago with an estimated total
useful life of 10 years for ` 60,000. The value of the machine in the books would stand at ` 30,000,
assuming no scrap value. We further assume the same machine today costs ` 1,00,000 in the
market. The value of this machine now will be shown in the books as ` 50,000 (` 1,00,000 less
depreciation for five years assuming no scrap value).
2. Net realisable value: This is the value which is represented by the net cash proceeds if the
existing asset is sold now.
3. Economic value: It refers to the discounted (present) value of the net income that will be
earned from using the existing assets during the remaining life of the asset. Thus, it is the
net present value of the future anticipated net income that the asset is likely to generate. A
close examination of the asset values discussed above indicates that the replacement cost
value is the purchasing value, net realisable value is the sale value and the economic value
is the holding value.

Example: TATA firm purchased machinery for a sum of `10 lakhs, on January 1, 2005. It
had an expected life of 10 years without any scrap value. The price indices for the asset were as
follows:

January 1, 2005 100
January 1, 2008 160
December 31, 2008 175
You are required to value the machinery on January 1, 2008 and December 31, 2008, both according
to Historical Cost Accounting System and Current Cost Accounting System, charging depreciation
on ‘straight line basis.
Solution:
Statement Showing the Value of Machinery

Particulars January 1, 2008 December 31, 2008
Historical Current Historical Current
Cost (`) Cost (`) Cost (`) Cost (`)
Cost 10,00,000 16,00,000 10,00,000 17,50,000
Depreciation (3 Yrs/4 Yrs) 3,00,000 4,80,000 4,00,000 7,00,000
7,00,000 11,20,000 6,00,000 10,50,000

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