Reference no: EM132571945

Question - On 1 January 20X5, a company purchased a machine at a cost of $2000. It has a useful life estimated to be 8 years, and this machine has a residual value of $400.

At 31 December 20X7, it was estimated that the machine could be sold for $4000. However, if the company could provide maintenance for this machine, it would be sold for $10,000. The maintenance fee was $2000. If the company continued to use the machine, management estimated that it would generate net cash inflows of $2000 each year during the remaining useful life.

Required -

(1) Calculate the amount of value for this asset shown in the financial report at the year-end 20X7.

(2) Calculate the market value, the net realizable value, and the economic value at the end of 20X7. At that time, the company had three options to deal with the machine: to sell the machine directly, to sell it after maintenance, and to keep it. What would be the best option from an economic view?

(3) Use this case to discuss the advantages and the disadvantages of the historical cost method to value a fixed asset.

Suppose you try to write a research paper using this case in which you maintain a stance of advocating alternative costing and critiquing the traditional historical cost method. Is your research classified to positive or normative accounting theory?