the president of your firm, Lesky and Lesky, has little background in accounting
ID: 2732626 • Letter: T
Question
the president of your firm, Lesky and Lesky, has little background in accounting. Today, he walked into your office and said "A year ago we bought a piece of land for $100,000. This year, inflation has driven prices up by 6% and an appraiser just told us we could easily resell the land for $115K, Yet our balance sheet still shows it at $100,000. It should be valued at $115K. Thats what is worth. Or, at a minimum of $106K. Responde to this statement with specific reference to the accounting principles applicable to this situation.
Explanation / Answer
Cost principle states that assets are to be recorded at cost for which it is acquired.
Balancesheet will represent Historic cost minius accumulated depreciation.
Historic cost may be replaced with current market value on each balancesheet date if asset is having a ready market with quoted prices.
In the given case the appraiser just told us we could easily resell the land at $115K.
So,as per President advise,land can be recorded at $115K.
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