Question

Lorna Smith decided to start her own CPA practice as a professional​ corporation, Smith CPA PC. Her corporation purchased an office building for​ $35,000 that her real estate agent said was worth​ $50,000 in the current market. The corporation recorded the building as a​ $50,000 asset because Lorna believes that is the real value of the building. Which of the following concepts or principles of accounting is being​ violated?

A) cost principleB) economic entity assumptionC) monetary unit assumptionD) going concern assumption

Answer 1

The correct answer is A) cost principle.

Step-by-step explanation:

According to the cost principle, the acquired assets and services must be recorded at their actual cost (also called historical cost). Although the buyer thinks that he obtained a bargain, the good is recorded with the price paid in the transaction, not at its “expected” cost. Assume that your sound equipment store acquires equipment from a vendor in liquidation. Consider also that the transaction is a bargain and pay just $ 2,000 for the equipment that would normally have cost you $ 3,000. The cost principle needs to record the actual cost of $ 2,000, not the $ 3,000 that the equipment is worth.