The irrelevance of original cost
Three years ago Yeagley and Sons purchased the three assets listed in the following table. The chief financial officer, Kathy Dillon, is presently trying to decide what to do with each asset. She has three choices for each asset: (1) sell it, (2) sell it and replace it with an equivalent asset, or (3) keep it. The following information is provided to aid her decision.
|
Asset |
Original Cost |
Replacement Cost |
Fair Market Value |
Present Value |
Present Value |
|
A |
$4,000 |
$1,000 |
$1,500 |
$2,500 |
$5,000 |
|
B |
1,500 |
2,000 |
500 |
2,500 |
3,500 |
|
C |
2,000 |
3,500 |
3,000 |
2,500 |
5,000 |
REQUIRED:
a. Assuming that Kathy chooses to keep Asset A and Asset B and sell and replace Asset C, evaluate her decisions. What decisions should she have made? Support your choices.
b. How useful was the original cost of each asset in the evaluation of Kathy”s decisions?
c. Assume that Kathy proceeds with her decisions. According to generally accepted accounting principles, at what dollar amount would each asset be carried on Yeagley”s balance sheet? What principles of financial accounting would be involved?