Question

It is September 24, 2019, and your company is considering the purchase of land for future expansion. The seller is asking $50,000 for the land, which cost them $35,000 four years ago. An independent appraiser assigns the land a value of $47,000. You offer the seller $44,000 for the land and they come back with a counter-offer of $48,000. You and the seller end up settling on a purchase price of $46,000 for the land. 2. Requirements: 1. When you record the purchase of this land in your accounting records, at what value will you record it? Assume that four years later someone approaches your company and offers to purchase this land, which you have yet to develop, for $60,000. You know this to be a fair price given a recent appraisal you had done on the land. You decline the offer because you have plans to begin developing the land next year. What adjustment would you make to the value of the land in your accounting records?

Answer 1

The above question is based on the accounting principle of Historical cost of accounting .

According to this principle the asset is to be recorded at the price actually paid at the time of purchasing it.

1. In the above case the land is purchased at $46,000 thus it should be recorded in the books at $46000 only.

2.As there is no development done on the land , there is no need for any adjustment . The land continues to be recorded at its cost (historical cost) price that is $46000

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