Question

Measurement of a Nonmonetary Asset. Assume American Airlines acquires a regional airline in the midwestern United States for $450 million. American Airlines allocates $150 million of the purchase price to landing rights at various airports. The landing rights expire in five years. What type of measurement is applicable to the valuation of the landing rights at acquisition and at the end of each of the five years?

Answer 1

Solution:

The adjusted historical cost is applicable to the valuation of the landing rights and acquisition at the end of each of the five years. Adjusted historical cost is the premium paid for acquiring an entity more than its tangible assets are worth. When the future economic benefits of an asset are uncertain, companies use historical cost and adjusted historical cost as a representationally faithful measure of the asset’s value. In this situation, the service is used gradually over a period of 5 years. Since the life of intangibles is limited, the asset is reduced and expenses are increased gradually.