Question

Question 3: Accounting for values (35 marks, 300
words).
XYZ Company bought real estate properties in Boston 50 years ago
for $30,000. In 2020, a real estate appraiser inspects the properties
and concludes that their expected market value is $2 million. The
company has been using historical accounting principles for the last
50 years. A newly appointed financial manager recommends the
use of fair value accounting for the value of the properties. Discuss
the difference between the two approaches. Do you agree with the
financial manager? Why or why not?

Answer 1

Answer:

It is logically better to use the fair value approach because the historical value of the property is multiple times less than the present fair value of the property.

Explanation:

The difference between historical accounting principle and fair value accounting principle is that the historical accounting principle considers the value at which the property was purchased.

For example in the given question $\mathrm{XYZ}$ company brought the real estate property at $\ 30,000$ so into the historical accounting principle the value of the property is 30000 US dollars. Whereas on the other hand the fair accounting principle considered as the the actual value of the property as per the present value.

For example in the given question $X Y Z$ company concludes that the expected market value of the price is dollar $2$ million. So in the given case, I totally agree with the financial manager that the the value of the property must be estimated according to the fair value accounting principle rather than historical accounting principle.

• The financial manager has the the right set of skills and expertise to evaluate the property and hence his method of estimation is more correct because he considers the the fair value estimation of the property.
• It is logically better to use the fair value approach because the historical value of the property is multiple times less than the present fair value of the property.

Learn more about fair value accounting, refer :

https://brainly.com/question/15310814