Question

The city of Fairbanks donated land to the Big Oil Company on June 1, 2006, that originally cost the city $900,000. On June 1, 2006, the land was estimated to be worth $1,250,000, and on December 31, 2006, the land's value was estimated to be $1,300,000. On Big Oil Company's balance sheet at December 31, 2006, the land should be valued at

Answer 1

The Big Oil Company should value the donated land at its fair market value on the date of donation, which was $1,250,000 on June 1, 2006, and not adjust for the estimated increase to $1,300,000 at the end of the year according to GAAP.

Step-by-step explanation:

When accounting for a donation of land, the Big Oil Company should record the asset at its fair market value on the date of the donation. Hence, on June 1, 2006, when the donated land originally cost the city $900,000 and was valued at $1,250,000, the company should record the land at $1,250,000.

However, changes in the value of land post-acquisition are typically reflected in either an appraisal account separate from the original land account or not recorded at all until the land is sold. Generally Accepted Accounting Principles (GAAP) do not require or allow the adjustment of land value on the balance sheet due to fluctuations in market price after acquisition.

Therefore, on the Big Oil Company's balance sheet on December 31, 2006, the land should be valued at the initial recorded amount, which is $1,250,000, despite its estimated value being $1,300,000 at the end of the year.