Accounting Principle : Accounting principle are the special guidelines that should be followed by the company for recording the financial transactions of the company.
Cost Principle: As per cost principle, a new asset purchased by a company it should be recorded at its actual cost instead of its current market value.
To identify: The correct option.
Answer:
Option c-$450,000' is correct.
Explanation of Solution
Option c:
- As per GAAP guidelines the new asset purchased by a company will always recorded at its actual cost based on cost principle of GAAP.
- In the given case, a building is offered for sale at $500,000 but the current value of building is $ 400,000, the purchaser of building think the worth of building is of $475,000, but actually pay to supplier $450,000 so the correct option is c, $450,000
- So, the current market value does not matter for accounting purpose of a fixed asset.
Option a:
As buyer does not pay $50,000 for machinery, so it is incorrect option.
Option b.
Current value of machinery plays no role in accounting. Only actual value will be recorded in books of accounts, so option b $400,000 is incorrect.
Option d:
Accounting is not done as per the thinking of the buyer so, option d $475,000 is incorrect option.
Option e:
Accounting is not done as per the thinking of the seller, so option e $500,000 is incorrect option.
Thus, the correct option is c.
Want to see more full solutions like this?
Chapter 1 Solutions
FINANCIAL ACCOUNTING FUNDAMENTALS
- Referring to PA7 where Kenzie Company purchased a 3-D printer for $450,000, consider how the purchase of the printer impacts not only depreciation expense each year but also the assets book value. What amount will be recorded as depreciation expense each year, and what will the book value be at the end of each year after depreciation is recorded?arrow_forwardFor each of the following transactions, state whether the cost would be capitalized (C) or recorded as an expense (E). A. Purchased a machine, $100,000; gave long-term note B. Paid $600 for ordinary repairs C. Purchased a patent for $45,300 cash D. Paid $200,000 cash for addition to old building E. Paid $20,000 for monthly salaries F. Paid $250 for routine maintenance G. Paid $16,000 for major repairsarrow_forwardThe following intangible assets were purchased by Hanna Unlimited: A. A patent with a remaining legal life of twelve years is bought, and Hanna expects to be able to use it for six years. It is purchased at a cost of $48,000. B. A copyright with a remaining life of thirty years is purchased, and Hanna expects to be able to use it for ten years. It is purchased for $70,000. Determine the annual amortization amount for each intangible asset.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
- Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College