Accounting Online Program Certification Practice Test

What treatment did Redruth plc follow for the carrying amount of its plant and equipment?

1. Revaluation basis

2. Cost basis

3. Net realisable value basis

4. Amortisation basis

The correct answer is: Cost basis

The carrying amount of plant and equipment typically refers to the value at which an asset is recognized on the balance sheet after accounting for depreciation or amortization, if applicable. In many cases, companies follow the cost basis for reporting plant and equipment, which involves recording the assets at their historical cost, including any costs necessary to bring the asset to its intended use. Under the cost basis, the company will depreciate the asset over its useful life, systematically recognizing the wear and tear on the asset as an expense. This conservative approach aligns the recorded asset value with what the company actually spent to acquire it, providing a clear reflection of the company’s investment and how it is depleted over time. Choosing a revaluation basis or a net realizable value basis would involve more subjective assessments and could lead to volatility in the financial statements due to fluctuations in fair value. The amortisation basis is more commonly used for intangible assets rather than tangible plant and equipment. Thus, the cost basis is the most straightforward and widely accepted treatment for the carrying amount of plant and equipment, making it the appropriate choice in this context.