Question

A company purchased a building for $45,000 cash and recorded its cost on the books at that amount. However, the fair value of the building was $46,500 on the date of purchase. How should the company account for this $1,500 difference? a. Increase the recorded cost of the building to $46,500

b. Leave the recorded cost of the building at $45,000
c. Decrease the recorded cost of the building to $46,500
d. Record the $1,500 difference as a gain in the income statement

Answer 1

The company should leave the recorded cost of the building at $45,000, as asset valuation should follow the historical cost principle. The $1,500 difference is an unrealized gain and would not be recognized until the asset is sold for a value higher than its recorded cost.

Step-by-step explanation:

When a company purchases a building, it is recorded on the books at the cost of the transaction, not at the fair value on the date of purchase. Therefore, the correct way to account for the $1,500 difference between the cash paid ($45,000) and the fair value ($46,500) is to:

b. Leave the recorded cost of the building at $45,000

This method follows the historical cost principle, which states that assets should be recorded at their cash or cash-equivalent at the time of transaction. The $1,500 difference would not be recorded as a gain on the income statement because it is an unrealized gain; it only becomes relevant if and when the building is sold for more than its recorded cost.