8RQ. - Horngren'S Financial And Managerial Accounting

Question

A business purchases an acre of land for \(5,000. The current market value is \)5,550, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer?

Step-by-Step Solution

Answer

The land should be recorded at $5,000, and it supports the cost principle. 

Step 1: Explanation of cost principle

 As per the cost principle of accounting, assets or services purchased by the business entity should be recorded at the purchase cost or the historical cost.

Step 2: Reporting of land

In the given case, the land is purchased at a price of $5,000, hence it will be reported at $5,000 only. It will not be affected on the basis of market value and the value determined for the property tax purpose.