Shares received from the new company are recorded at
A. Face value
B. Average price
C. Market value
D. None of the above
Answer» C. Market value
The correct answer is C. Market value. When shares are received from a new company, they are typically recorded at their market value. This means that the value assigned to the shares is based on the current price at which the shares are trading in the open market. Here’s why market value is the correct option:
Market value reflects the current worth: The market value of shares represents the current price at which the shares can be bought or sold in the open market. It is determined by the forces of supply and demand and represents the consensus value as perceived by market participants. Recording shares at market value provides an accurate reflection of their current worth.
Relevant for financial reporting: Market value is important for financial reporting purposes, as it provides a fair and transparent representation of the value of an asset. Companies are required to report their financial statements based on the fair value principle, which states that assets and liabilities should be reported at their market value whenever possible. Recording shares at market value ensures compliance with this principle.
Reflects the true economic value: Market value reflects the true economic value of shares. It takes into account various factors such as the company’s financial performance, future growth prospects, industry trends, and investor sentiment. By recording shares at market value, the accounting records reflect the value that investors in the market place on those shares.
Now let’s discuss why the other options are incorrect:
A. Face value:
Face value is the nominal value assigned to a share when it is issued by a company. It is typically a fixed value that remains the same over time, regardless of changes in market conditions. However, the face value of a share is not a reliable indicator of its actual worth or market value. Therefore, recording shares at face value would not provide an accurate representation of their value.
B. Average price:
Average price is the arithmetic mean of the prices at which shares were bought or sold over a specific period. While average price may be useful for certain purposes, such as calculating the average cost of shares for tax purposes or internal management reporting, it is not the appropriate measure for recording shares received from a new company. Average price does not reflect the current market conditions or the true value of the shares.
D. None of the above:
This option is incorrect because market value is indeed the most appropriate measure for recording shares received from a new company. It captures the current worth of the shares, complies with financial reporting standards, and reflects the true economic value.
In summary, recording shares received from a new company at their market value is the correct approach. Market value represents the current price at which shares are traded in the open market and provides an accurate reflection of their worth. It is relevant for financial reporting, complies with the fair value principle, and reflects the true economic value of the shares. Other options such as face value or average price do not capture the current market conditions or the actual value of the shares.
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,