Fixed assets are ordinarily presented on the balance sheet at their current market value under “Intangible assets” at their cost less accumulated depreciation at their replacement cost.
The correct answer and explanation is :
The correct answer is that fixed assets are ordinarily presented on the balance sheet at their cost less accumulated depreciation. They are not typically presented at their current market value or replacement cost under “Intangible assets.”
Explanation:
Fixed assets, also known as tangible assets, are long-term assets that are used in the production of goods or services and are not intended for resale. These assets include things like land, buildings, machinery, and equipment.
- Historical Cost Convention: According to generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS), fixed assets are typically recorded on the balance sheet at their historical cost. This means the initial cost incurred to acquire the asset, including any purchase price, installation, and other costs directly related to bringing the asset into its intended use.
- Accumulated Depreciation: Over time, fixed assets are depreciated to reflect their usage and wear and tear. Depreciation is the systematic allocation of the cost of the asset over its useful life. The accumulated depreciation is subtracted from the historical cost to determine the net book value or carrying value of the asset on the balance sheet.
- For example, if a company purchases a machine for $100,000 and it depreciates $20,000 over several years, the machine’s book value on the balance sheet would be $80,000.
- Not Market Value or Replacement Cost: Fixed assets are not generally shown at current market value or replacement cost unless the company applies a revaluation model under IFRS. Even then, the fair value (market value) can only be used for some assets, and they must be revalued regularly.
- Intangible Assets: Fixed assets are tangible and should not be confused with intangible assets, which include things like patents, trademarks, and goodwill. Intangible assets do not have a physical presence and are accounted for separately from tangible fixed assets.
In summary, fixed assets are presented on the balance sheet at their cost less accumulated depreciation, which reflects their value over time, not their current market or replacement value.