valued at $850,000 by a real estate expert. The president of the company is questioning the accuracy of the firm’s latest balance sheet because it shows a book value of $550,000 for the building. How would you explain this situation to the president

There is a difference between the book value and the fair value of an asset. The book value is based on the asset's historical cost. The fair value is the current market price of the asset. In reporting long-term assets, the acceptable basis is the historical cost or the cost of acquiring the asset. This cost is further reduced by annual depreciation charges. The fair value is not often the acceptable basis for reporting long-term assets unless the entity is no longer a going concern or the asset has suffered an impairment loss.

Explanation:

a) Data and Calculation:

Fair value by a real estate expert = $850,000

Book value (historical cost) = $550,000

Difference between fair value and book value = $300,000

andromache andromache · Answer 2 · 2021-12-28T13:37:36+01:00

The explanation regarding the given situation is described below:

It considered the fair value of the asset at the time of valuation of an asset.
At the time of valuation of the asset in the balance sheet, the asset should be recorded like = cost of the asset - depreciation.
The asset valuation should be recorded at the book value always not the fair value.

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