Question

Part 4A (9 points) Requirement 1: The FASB's Conceptual Framework includes the "mixed asset measurement concept" that defines 5 different ways that assets could be measured. Identify 1 of the 5 measurement attributes, OTHER THAN HISTORICAL COST, and explain how it is measured. (Example: Historical cost is measured as the purchase price minus accumulated depreciation.) Requirement 2: In accrual accounting revenues and expenses may not be recorded at the same time as cash is received or paid. Describe a transaction for each of the following where: (Each of your answers will be 1-2 sentences, NOT journal entries.) a. Revenue is recorded in accrual accounting AFTER cash is received b. An expense is recorded in accrual accounting AFTER cash is paid.

Answer 1

Answer 1: "Current Value" measurement is explained below

The measurement bases could be used in financial statements in one of several ways. In particular:

(a)a single measurement basis could be used for all assets and liabilities. For example, all assets and liabilities could be measured using historical cost. This is known as the historical cost system. Alternatively, all assets and liabilities could be measured at current value. This is known as the current value system.

(b)some categories of assets or liabilities could be measured on a historical cost basis and some on a current value basis. This is known as the mixed measurement system. In reality there is not one mixed measurement system but many, each involving a different mix of historical cost and current value.

The mixed measurement system permits the measurement basis to be selected separately for each category of assets or liabilities. It also permits the use of historical cost (or current value) for all assets and liabilities if historical cost (or current value) is the most appropriate measure for each of those categories. Thus it can be adapted to fit the particular circumstances involved.

The current value of an asset could be determined by reference to entry value (replacement cost), exit value (net realisable value) or value in use (discounted present value of the cash flows expected from continuing use and ultimate sale by the present owner). For some assets (for example investments in actively traded securities), these three alternative measures of current value produce very similar amounts, with only small differences due to transaction costs. However, for other assets (for example fixed assets specific to the business), differences between the alternative measures can be material.

Initial recognition: An asset or liability that is being measured using the current value basis will be recognised initially at its current value at the time it was acquired or assumed.

Subsequent remeasurement: When the current value basis of measurement is being used, remeasurement takes place to ensure that the assets or liabilities involved are measured at an up-to-date current value. Such remeasurements will, however, be recognised in the financial statements only if:

(a)there is sufficient evidence that the amount of the asset or liability has changed. For example, if consideration is being given to writing down the carrying amount of an asset to its recoverable amount, there will need to be sufficient evidence that the asset's recoverable amount is lower than its carrying amount; and

(b)the new amount of the asset or liability is capable of being measured with sufficient reliability.

Answer 2:

a. In case the revenue for a particular goods is uncertain, then it is to be recorded only when the cash is received. For example sale of goods to bankrupt customer.

b. An expenditure measurement of which is uncertain, is to be recorded only when it is paid. Eg: Payment of bank charges.