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Chapter 1: 8RQ. (page 32)

A business purchases an acre of land for \(5,000. The current market value is \)5,550, and the land was assessed for property tax purposes at $5,250. What value should the land be recorded at, and which accounting principle supports your answer?

Short Answer

Expert verified

The land should be recorded at $5,000, and it supports the cost principle.

Step by step solution

01

Explanation of cost principle

As per the cost principle of accounting, assets or services purchased by the business entity should be recorded at the purchase cost or the historical cost.

02

Reporting of land

In the given case, the land is purchased at a price of $5,000, hence it will be reported at $5,000 only. It will not be affected on the basis of market value and the value determined for the property tax purpose.

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Most popular questions from this chapter

Pretty Pictures works weddings and prom-type parties. The balance of Retained Earnings was \(20,000 at December 31, 2017. At December 31, 2018, the business’s accounting records show these balances: Insurance Expense \) 6,000 Accounts Receivable $ 5,000 Cash 42,000 Notes Payable 10,000 Accounts Payable 13,000 Retained Earnings, Dec. 31, 2018 ? Advertising Expense 4,500 Salaries Expense 30,000 Service Revenue 115,000 Equipment 85,500 Dividends 13,000 Common Stock 28,000 Prepare the following financial statements for Pretty Pictures for the year ended December 31, 2018: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

Amos Sharp recently opened his own accounting firm on October 1, which he operates as a corporation. The name of the new entity is Amos Sharp, CPA. Sharp experienced the following events during the organizing phase of the new business and its first month of operations in 2018. Oct. 5 Sharp deposited \(45,000 in a new business bank account titled Amos Sharp, CPA. The business issued common stock to Sharp. 6 Paid \)300 cash for letterhead stationery for new office. 7 Purchased office furniture for the office on account, \(6,500. 10 Consulted with tax client and received \)3,300 for services rendered. 11 Paid utilities, \(340. 12 Finished tax hearings on behalf of a client and submitted a bill for accounting services, \)16,000. 18 Paid office rent, \(1,800. 25 Received amount due from client that was billed on October 12. 27 Paid full amount of Accounts Payable created on October 7. 31 Cash dividends of \)3,800 were paid to stockholders. Requirements 1. Analyze the effects of the events on the accounting equation of Amos Sharp, CPA. Use a format similar to Exhibit 1-6. 2. Prepare the following financial statements: a. Income statement. b. Statement of retained earnings. c. Balance sheet.

Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation, March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted for by the business. Mar. 1 Sold personal investment in Amazon stock, which she had owned for several years, receiving \(35,000 cash. 2 Deposited the \)35,000 cash from the sale of the Amazon stock in her personal bank account. 3 Deposited \(73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The business issued common stock to Pachelo. 5 Paid \)700 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, \(5,000, within three months. 9 Received \)2,800 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, \(400. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, \)10,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, \(1,200. 31 Received \)3,300 cash from clients billed on March 23. 31 Cash dividends of $5,500 were paid to stockholders. Requirements 2. Prepare the following financial statements: b. Statement of retained earnings.

Compute the missing amount in the accounting equation for each entity from the financial information presented:

Assets Liabilities Equity

Hair Styles \( ? \) 36,000 $ 36,000

Style Cuts 90,000 ? 48,000

Your Basket 101,000 68,000 ?

Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation, March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted for by the business. Mar. 1 Sold personal investment in Amazon stock, which she had owned for several years, receiving \(35,000 cash. 2 Deposited the \)35,000 cash from the sale of the Amazon stock in her personal bank account. 3 Deposited \(73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The business issued common stock to Pachelo. 5 Paid \)700 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, \(5,000, within three months. 9 Received \)2,800 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, \(400. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, \)10,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, \(1,200. 31 Received \)3,300 cash from clients billed on March 23. 31 Cash dividends of $5,500 were paid to stockholders. Requirements 1. Analyze the effects of the preceding events on the accounting equation of Annette Pachelo, Attorney. Use a format similar to Exhibit 1-6.

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