Question

Mickelson Inc. owns land that it purchased on January 1, 2000, for $450,000. At December 31, 2017, its current value is $770,000 as determined by appraisal. At what amount should Mickelson report this asset on its December 31, 2017, balance sheet? Explain

Answer 1

Mickelson Inc. should report the land at the historical cost of $450,000 on its balance sheet for December 31, 2017, due to the historical cost convention in accounting.

Step-by-step explanation:

Mickelson Inc. should report the land on its balance sheet at the original purchase price of $450,000. This is due to the accounting principle known as the historical cost convention, which states that assets should be recorded on the balance sheet at their original cost.

Even though the current value of the land is determined by appraisal to be $770,000 as of December 31, 2017, most accounting frameworks, such as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), require that the land continues to be reported at historical cost unless a decision is made to revalue the asset, which is applicable in certain circumstances under IFRS. However, GAAP does not generally allow revaluations of land to be reflected in the financial statements.

Mickelson Inc. should report the land on its December 31, 2017, balance sheet at its appraised value of $770,000. The balance sheet reports an entity's assets at their current market value, which in this case is determined by the appraisal. This approach provides a more accurate representation of the value of the asset.