Question

Martin Corporation purchased land in 2007 for $290,000. In 2015, it purchased a nearly identical parcel of land for $460,000. In its 2015 balance sheet, Martin valued these two parcels of land at a combined value of $920,000. By reporting the land in this manner, Martin Corp. has violated the
a. historical cost principle
b. convergence
c. economic entity assumption
d. monetary unit assumption

Answer 1

Answer:

a. Historical Cost Principle

Explanation:

The principle of historical cost notes that firms must report and account for most assets and liabilities at their acquisition or purchase price.

In certain terms, the companies need to report an asset for the amount paid for the asset on their balance sheet.

The cost or price of the product is then never adjusted for business or economy fluctuations and adjustments due to inflation.

Martin Corp. however combined both properties and adjusted them for inflation. They should have recorded them separately and never adjusted for business or economy fluctuations

Answer 2

Answer:

A) historical cost principle

Explanation:

The historical cost principle states that a company should record its assets, liabilities and equity investments at their original purchase costs.

So Martin Corporation should record its parcels of land at $290,000 + $460,000 = $740,000

This is done because the purchase price of the land is the land basis, and the basis is used to calculate taxes. If Martin Corporation reported the land at $460,000, it would have made a $160,000 capital gain and it should pay taxes for it, and no one would make such a mistake.