Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $218,252. Focus Company initially offered to buy the land for $179,248. The companies settled on a purchase price of $207,236. On the same day, another piece of land on the same block sold for $231,763. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Donner Company is selling a piece of land adjacent to its business premises. An appraisal reported the market value of the land to be $218,252. Focus Company initially offered to buy the land for $179,248. The companies settled on a purchase price of $207,236. On the same day, another piece of land on the same block sold for $231,763. Under the cost concept, at what amount should the land be recorded in the accounting records of Focus Company
The cost concept of accounting states that all acquisitions of items (eg, assets or items needed for expansion) should be recorded and retained in books. It can also be said that, if an asset does not cost anything i.e., no money is paid for its acquisition, it would not be recorded in the company's books. The cost concept allows stability in asset prices during the recording. The recording of assets at cost of acquisition meets the convention of Objectivity.
There are some limitations of the cost concept like an overstatement of net profit in the context of inflation.
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