Question

In the space provided on the Answers Sheets, state whether each of the following practices were “Acceptable” or “Not Acceptable” accordance to GAAP. The, state your reason – Why? You must state the name of specific accounting principle/concept/assumption that is applicable in your reasoning. 2.1. In 2010, Zoom Company purchase a piece land for $30,000 for storage. Company debited Land account for $30,000. On Dec. 31, 2017, Zoom Company was informed that the fair market value of the land is about $55,000. The accountant at Zoom Company made the following journal entry to reflect the fair market value of land in the Balance Sheet and to recognize the gain in value in Income Statement.

Debit: Land $25,000

Credit: Gain due to increase in value of land 25,000

Answer 1

Above journal entry made by the accountant at Zoom Company is Not Acceptable

Reason : you should not record the asset cost at current market price or fair market value.you should record only the original cost in the books of accounts. If you sold that particular Asset, this time you can record loss or gain from that asset based on the fair market value.

If you sold the asset more than the book value, you will get gain on sale.

If you sold the asset less than the book value ,it is the loss on sale of asset.

Principle/concept /assumption : HISTORICAL COST CONCEPT

For the above reasoning historical cost concept is useful for recording the transaction.

According to the historical concept the assets are recorded at their original cost or acquisition cost. I mean that you should record the asset cost at the time of the purchase of the asset.

Finally you should not record the amount of 25000 into the book of income statement and balance sheet ,because it is the historical cost concept.