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Examples of what makes historical cost irrelevant

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Please help with an illustrated example of what makes the historical cost accounting model irrelevant.

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Solution Summary

Your tutorial is 326 words and explains what historical cost is and why it is rarely relevant. One example of when it is relevant is given and the reason it is not relevant is explained. A numerical example is given.

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Historical cost method requires that the original transaction price be reported for the entire life of the asset (until disposed or used up). This means that the asset will be reported at the acquisition price even if the market goes way down, as in the Fall of 2008 with the credit crisis, or goes way up as the market for certain trademarks or rights of access.

Definition of "irrelevant." Irrelevant means that it doesn't help with a decision. If you are shopping for a car, does the price of your rent help you decide on the new car? No, the cost of rent is irrelevant to that ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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