A long-term asset that is retired from operations and held for disposal or sale is valued at ________.

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BlackTom AI · Accepted Answer

To tackle this question, I will examine what the prompt describes and then evaluate each option in light of accounting principles for long-term assets held for disposal.
Option 1: 'replacement cost' — This concept refers to the amount that would be required to replace the asset with a similar one at current prices. It is typically used in inventory measurement under certain frameworks and in some impairment contexts, but not for valued long-term assets held for disposal. Therefore this choice doesn’t align with the described scenario.
Option 2: 'value in use' — Value in use is the recoverable amount calculated as the present value of future cash flows from continuing use of an asset. It applies to asset impairment testing or ongoing use, not to assets held for disposal. Since the asset is retired from operations and held for disposal, value in use is not appropriate.
Option 3: 'lower of carrying value or net realizable value' — This option matches the standard treatment for long-term assets held for disposal. The asset is carried at the lower of its carrying amount (book value) and its net realizable value (the estimated selling price less costs to sell). This reflects impairment principles while recognizing disposal value upon sale. Thus, this is the correct approach for assets retired from operations and held for disposal.
Option 4: 'lower of cost or market' — This is a valuation rule historically used for inventories under specific GAAP (lower of cost or market) and not applicable to long-term assets held for disposal. It does not describe the appropriate measurement for a long-term asset being disposed of, making it incorrect in this context.
In summary, the reasoning hinges on identifying the disposal context: assets held for disposal are measured at the lower of carrying value or net realizable value, rather than replacement cost, value in use, or the older lower of cost or market rule. The correct principle aligns with impairment and disposal accounting practices, ensuring the asset is not overstated relative to potential selling proceeds after disposal costs.

A long-term asset that is retired from operations and held for disposal or sale is valued at ________.

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