Question

A company has a factory building that originally cost the company $250,000. The current fair value of the factory building is $3 million. The president would like to report the difference as a gain.

The write-up would represent a violation of which accounting assumption or principle?

Answer 1

Answer: historical cost

Explanation: Historical cost is the original price that the factory building was acquired at. That would be $250,000. This asset needs to be disclosed in the books of the business at this value. This is the true/actual value of the business and the books must reflect this figure.

The fair value shows the current value today of the asset in market terms. Although this figure is the market value of the asset, according to Generally Accepted Accounting Practices (GAAP), factory buildings still need to be shown at its historical cost, so as not to overstate the value of the asset. So if the president shows a gain in this asset's value, the president will be overstating the value of the asset.