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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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It is the end of 2019 and you are an accountant for Stone Company. During 2019, sales of the company’s products slumped and the company’s earnings are expected to be much less than those of 2018. The president comes to you with an idea. He says, “Our company’s property, plant, and equipment cost $300,000, and that is the amount we usually report on our balance sheet. However, I just had these assets appraised by an independent appraiser, and she says they are worth $400,000. I think that the company should report the property, plant, and equipment at this amount on its December 31, 2019, balance sheet and should report the $100,000 increase in value as a gain on the 2019 income statement. If we use this approach, it will show how much our company is really worth and increase our earnings. This will make our shareholders happy. What do you think?”

Required:

Prepare a written response to the president.

To determine

Prepare a memo to the president.

Explanation

Historical Cost Principle

Historical cost principle indicates that the value of the assets is listed at its purchased value rather than the current market value.

Memo

From:

Accountant

To:

President,

Company S

Respected sir,

Recording of property, plant, and equipment at its appraised value is not appropriate. As, per GAAP (Generally Accepted Accounting Principles), property, plant, and equipment must be recorded at its historical cost (purchase price) minus accumulated depreciation, if any. Hence, recording at its appraised value would violate the historical cost concept of GAAP.

On the other hand, if property, plant, and equipment are recorded at its appraised value to show profit in the current  year, then consequently it would reduce the comparability of own financial statements as well as competitor’s financial statements who follows GAAP...

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