A company records its machinery at the price it paid and does not adjust the figure each year for increases in market value. Which concept or measurement basis is this?
Answer and explanation
Correct answer: D. Historical cost
- Step 1: Measuring an asset at the amount paid when it was acquired is historical cost.
- Step 2: Fair value, net realisable value and present value all update or estimate values instead.
Answer
Historical cost.
Why not the others: Fair value: Fair value would require the figure to be updated to the current market price, which is the opposite of what is described. Net realisable value: This is the estimated selling price less costs to complete and sell, and is applied to inventories, not machinery. Present value: This would discount the future cash flows from the machine, which the company has not done.
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