Provide two alternatives on how the controller of the company can value the asset on the date of acquisition. Be sure to support your answer using the qualitative characteristics.

In 2010 the company purchased specialized equipment for $1,150,000. The market value of the equipment at the time of the acquisition was $1,170,000.

Management expects that the equipment will produce the following cash flows: $70,000 for the next 6 years, with a 30% chance that it could be $60,000 each year. Management expects that the residual value will be $40,000 in 6 years.

The risk adjusted rate is 8% and the risk free rate is 6%.

The carrying value of the equipment on December 31st, 2017 is $340,000.

Provide the benefits and any shortcoming of recording it one way versus the other. Provide your recommendation on how the controller of the company should have recorded the asset.


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