Question

Garrix Animal Supplies wanted to purchase a parcel of land from Sinatra Trash Can Company as the future site for a storage facility. Sinatra Trash Can Company listed the land at a price of $310,000. Garrix Animal Supplies was convinced that the land was worth $285,000, a price that was supported by an independent appraiser. The companies eventually agreed to a price of $298,750. Garrix closed the deal on March 14, 2016 at which time it incurred a broker commission of $11,950. During 2016 the fair value of the land appeared to rise quickly as Garrix Animal Supplies received five separate offers for the land at prices ranging from $315,000 to $325,000. The Company rejected the offers but re-hired the appraiser to estimate the land?s value. At December 31, 2016, the appraiser presented a report indicating the land had an estimated fair value of $317,500. In its GAAP balance sheet at December 31, 2016, Garrix Animal Supplies would report the land at a total value of:

Answer 1

Cost Principle - Assets are to be booked at the cost paid for, whether cash or other than cash. For this reason Financial Asset are booked at historical cost not the inflated price.

And because of going concern concept and matching concept Fixed asset are amortied/depreciated over a period of time, but land is not a depriciable asset.

Conservatism principle- If a situation arises where there are two acceptable alternatives for reporting an item, conservatism directs the accountant to choose the alternative that will result in less net income and/or less asset amount.The basic accounting principle of conservatism leads accountants to anticipate or disclose losses, but it does not allow a similar action for gains.

Here the cost incurred for puchasing the land was $ 310,700 (i.e. Purchase price $298,750+ broker commissions $11,950). Increse in value of the land should not be accounted for to follow cost and coservatism principle Income will be recognised in the books of account when actual sale made.

So, Garrix Animal Supplies would report the land value at $310,700 in its GAAP balance sheet as at Dec 31, 2016.