Page 415 - Accounting Principles (A Business Perspective)

The general rule on noncash exchanges is to value the noncash asset received at its fair market value or the fair
market value of what was given up, whichever is more clearly evident. The reason for not using the book value of
the old asset to value the new asset is that the asset being given up is often carried in the accounting records at

historical cost or book value. Neither amount may adequately represent the actual fair market value of either asset.
Therefore, if the fair market value of one asset is clearly evident, a firm should record this amount for the new asset
at the time of the exchange.
Appraised value Sometimes, neither of the items exchanged has a clearly determinable fair market value.
Then, accountants record exchanges of items at their appraised values as determined by a professional appraiser.
An appraised value is an expert's opinion of an item's fair market price if the item were sold. Appraisals are used
often to value works of art, rare books, and antiques.
Book value The book value of an asset is its recorded cost less accumulated depreciation. An old asset's book
value is usually not a valid indication of the new asset's fair market value. If a better basis is not available, however,

a firm could use the book value of the old asset.
Occasionally, a company receives an asset without giving up anything for it. For example, to attract industry to
an area and provide jobs for local residents, a city may give a company a tract of land on which to build a factory.
Although such a gift costs the recipient company nothing, it usually records the asset (Land) at its fair market value.
Accountants record gifts of plant assets at fair market value to provide information on all assets owned by the
company. Omitting some assets may make information provided misleading. They would credit assets received as
gifts to a stockholders' equity account titled Paid-in Capital—Donations.

An accounting perspective:

Use of technology

How can CPA firms sell services on the Web other than by advertising their services? Ernst &
Young has developed a website for nonaudit consulting clients in which they charge an annual
fixed fee for nonaudit clients to obtain advice from the firm's consultants. The site is secure in that
it can only be accessed by those who have paid the fee. The subscribers type in their questions on
any business topic and get a response from an expert within two working days. Another firm,
PricewaterhouseCoopers, has an on-line service for tax professionals to seek advice. The other
large accounting firms undoubtedly have developed or are developing secure websites for
providing similar types of services.

Depreciation of plant assets
Companies record depreciation on all plant assets except land. Since the amount of depreciation may be
relatively large, depreciation expense is often a significant factor in determining net income. For this reason, most
financial statement users are interested in the amount of, and the methods used to compute, a company's

depreciation expense.
Depreciation is the amount of plant asset cost allocated to each accounting period benefiting from the plant
asset's use. Depreciation is a process of allocation, not valuation. Eventually, all assets except land wear out or
become so inadequate or outmoded that they are sold or discarded; therefore, firms must record depreciation on

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