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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Under the going concern assumption, which of the following is the treatment of a fixed asset bought for Rs 6,00,000 that is expected to be used for 10 years in the business?

The asset is carried at cost less depreciation, with the cost spread over its useful life. The going concern assumption presumes the business will continue, so the asset will be used and not sold in a forced sale. Charging all of it in the first year or valuing it at liquidation value would be wrong.

  1. AIt is charged fully to profit and loss in the year of purchase
  2. BIt is shown at its likely forced sale value each year
  3. CIt is carried at cost less depreciation, and the cost is spread over its useful lifeCorrect
  4. DIt is not recorded because it is not meant for resale

Explanation

The business is assumed to continue, so the asset will be used and not sold in a hurry. Its cost is therefore spread over the years of use through depreciation. Showing forced sale value would be appropriate only if the business were expected to be wound up.

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