Reference no: EM132951255
Question - Company ABC Ltd is in the business of manufacturing household personal care products, e.g., hair oil, toothpaste, etc.
-The promoters of this company had set up its manufacturing plant in Pune about 15 years ago by investing Rs3 crore, inclusive of land cost, from personal capacity.
-The company owns the land where the manufacturing plant was set up. The land was purchased at Rs 1 crore, although its current market price is around Rs 15 crore.
-The company's financial health is not very sound and its debt burden has been rising. As of today, the company has a bank loan of Rs10 crore, which it needs to pay off within 3 years from the current year. It has dues payable to suppliers worth Rs2 crore, which are to be paid within 6 months.
-The company has invested net retained earnings worth Rs5 crore in the business over the years. These were the only source of fundings for the company. Based on the details presented above, answer the following questions. Answer the following question based on the information given above.
Accounting Conventions
As per the company's balance sheet, the total assets inclusive of land are worth 20 crore. However, you found out that the market value of the land alone is 15 crore, whereas in books, only 1 crore is accounted for the value of land. Why do you think companies do not value the land at fair market price?
a. It is conservatism, because we want to take the minimum price and be conservative.
b. Companies believe that they will not sell their core operating assets, e.g., plants and land, in the near future, and anticipating these gains will be highly subjective in nature. So, as per the historical cost concept, we value the assets at the purchase price.
c. It is the consistency concept, which states that the value once recorded must not be changed. It must be consistent over the years.
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