Multiple choice

A proprietor, Mr. X has reported a profit of Rs. 1, 00, 000 at the end of the financial year after taking into consideration the following amounts.

(i) The cost of an asset of Rs. 10, 000 has been taken as an expense. (ii) Mr. X is anticipating a profit of Rs. 5, 000 on the future sale of a car shown as an asset in his books. (iii) Salary of Rs. 200 payable in the financial year has not been taken into account. (iv) Mr. X purchased an asset for Rs. 50, 000 but its fair value on the date of purchases was Rs. 60, 000. Mr. X recorded the value of asset in his books at Rs. 60, 000

On the basis of the above facts answer the following question from the given choices: Which measurement base should be followed in statement (iv)?

  1. Historical cost

  2. Current cost

  3. Replacement cost

  4. Present value
Reveal answer Fill a bubble to check yourself
A Correct answer
Explanation

The measurement bases are: (1) Historical cost = original purchase price paid, (2) Current cost = replacement cost (cost to acquire same asset now), (3) Realisable value = selling price less disposal costs, (4) Present value = discounted future cash flows. Statement (iv) says: Mr. X purchased an asset for Rs. 50,000 but its fair value was Rs. 60,000 on purchase date, and he recorded it at Rs. 60,000. This violates the historical cost principle, which requires recording at the amount actually paid (Rs. 50,000). Therefore, the measurement base that SHOULD be followed is Historical Cost (A). Fair value at acquisition is irrelevant - what matters is what you actually paid.

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