One of the underlying assumptions of the accounting model is thegoing concern of assumption. When this assumption is questionable,valuation methods used for assets and liabilities may differ fromthose used when the assumption is viable. For each of the followingsituations, identify the measurement attribute that would mostlikely be used if the company is not likely to remain a goingconcern. 1. Plant and equipment are carried at an amortized cost ona straight-line basis of $2,100,000. I. An exit market value underdistressed conditions would be the proper valuation. II. theexpected sales price would be the proper valuation. III. thediscounted value of expected future principal and interestpayements on the company’s bonds would be the proper valuation. IV.none of the above is correct. 2. Bonds with a maturity price of$1,500,000 and interest in arrears of $400,000 are reported as anoncurrent liability. I. the discounted value of expected futureprincipal and arbitrage-free pricing approach would be the propervaluation for these bonds. II. Arbitrage-free pricing approach andinterest payments would be the proper valuation for these bonds.III. The discounted value of expected future principal and interestpayments would be the proper valuation for these bonds. IV. None ofthe aboive is correct. 3. Accounts receivable are carried at$600,000, the gross amount charged for sales. No allowance fordoubtful accounts is reported. I. Accounts receivable should bevalued at their net realizable value, regardless of the goingconcern assumption. A company in financial difficulty may have tosell its receivables to a third party rather than wait for theorderly collection process to occur. The expected sales price wouldbe the proper valuation. II. Accounts receivable should be valuedat their expected liquidation value, regardless of the goingconcern assumption. A company in financial difficulty may have tosell its receivables to a third parrt rather than wait for theorderly collection process to occur. The expected sales price wouldbe the proper valuation. III. Accounts receivable should be valuedat their net realizable value, regardless of the going concernassumption. A company in financial difficulty may have to wait forthe orderly collection process to occur. IV. None of the above istrue.
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