Question

Rudeen Corp. purchased equipment for $180,000 at a liquidation sale of a competitor. Because the equipment was worth $230,000, Rudeen valued the equipment in its subsequent balance sheet at $230,000. Agree/disagree; why?

Answer 1

Rudeen Corp. should record the equipment at the purchase cost of $180,000 in concordance with the historical cost principle and conservatism principle in accounting, despite the equipment's market value being $230,000.

Step-by-step explanation:

I disagree with Rudeen Corp.'s decision to value the equipment at $230,000 in its balance sheet. Typically, under the historical cost principle, an asset should be recorded on the balance sheet at its cost at the time of acquisition. The value at which Rudeen Corp. purchased the equipment, which is $180,000, is the amount that should reflect on their balance sheet, regardless of the equipment's market value.

The concept of conservatism principle in accounting also supports this approach, as it advises to report expenses and liabilities as soon as possible, but to recognize revenues and assets only when they are assured of being received. Thus, while the liquidation sale enabled the purchase of the equipment at a lower price, the subsequent balance sheet should record the cost of acquisition, not the potential market value.

It's important to note that revaluation of an asset to its fair market value is permissible under certain accounting frameworks, like the International Financial Reporting Standards (IFRS), but even then, it needs to adhere to specific guidelines and is often subject to depreciation or impairment calculations.