Finance questions
2.2
Asset valuation and recognition of net income closely relate. Explain including conditions when they do not.
Asset valuation is concerned with determining the true or real value of an asset, whereas income recognition entails making entries after receiving income. The two, assets valuation and recognition of income go hand in hand. Income is usually recognized when an asset, irrespective of whether current or fixed is sold out. To be in a position of getting the right amount of income to record, understanding the actual value of the asset is critical, hence raising the need for valuing the asset. Unless the true value of the assets is determined through asset valuation, then it will not be possible to record the right amounts of income. However, in the event of recording income relating to services, the relationship does not occur. It is not possible to recognize the real value of service through the asset valuation method. Value of services vary and mainly depend on the quality and individuals offering it.
2.3
Trade-offs among acceptable accounting alternatives
First-in, First-out (FIFO) assumes that the oldest inventory is the first to be sold. It is widely used by most companies and offers a lower cost of inventory concerning inflation. The items are older, and therefore, they are recognized at the old prices. In the case of Last-in, First-out (LIFO), it is assumed that the newest inventory is sold first. The method has got the effect of giving higher costs of inventory because inflation is captured in the current costs. Therefore, in the event, the inventory levels remain constant, and costs are increasing (prices going up), LIFO remains to the best method to use. LIFO recognizes changes in the pricing of items, indicating that it captures changes in inflation. FIFO ends up giving a false impression about firms’ profitability. During inflation, they make firms look more profitable than they are.
2.5
Measurement of the acquisition cost
United vans line purchased a truck with a list price of $250,000 subject to a 6% discount if paid within 30 days. United Vans Line paid within the discount period. It paid $400 to obtain title to the truck, with state and an $800 license fee for the first year of operation. It paid $15 to paint the firm’s name on the truck, and $2500 for property and liability insurance for the first year of operation. What acquisition cost of this truck should United Van lines record in its accounting records? Indicate the appropriate treatment of any amount not included in acquisition cost.
United Vans Line purchased the truck to use in its operations. The acquisition cost to be recorded should be inclusive of all costs incurred by the company until the track was ready for operations.
The acquisition costs to be recorded in the accounting records of the United Vans Lines will be determined as follows.
Purchase cost: $250,000
Less discount: ($15,000).
Net purchase cost: $235,000
Add truck title: $400
Add painting: $15
Total acquisition costs to record: $235,415.
Costs such as $2500 for property and liability insurance and $800 license fee have been excluded as they fall under operations. The costs are to be incurred repeatedly in each year, during the useful life of the truck, and therefore, they don’t fit under acquisition costs instead operating costs.