Question

Lisa Smith decided to start her CPA practice as a professional​ corporation, Smith​ CPA, PC. The corporation purchased an office building for​ $35,000. The real estate agent said the building was worth​ $50,000 in the current market. The corporation recorded the building as a​ $50,000 asset because Lisa believes that is the real value of the building. Which of the following concepts or principles of accounting is being​ violated? A) cost principle
B) economic entity assumption
C) monetary unit assumption
D) going concern assumption

Answer 1

Answer:

A) cost principle

Explanation:

Cost Principle is a fundamental guideline in accounting. It states that assets should be recorded in it's cash amount or it's equivalent at the time of purchase. In this scenario, the corporation(Smith CPA, PC) ignored this fundamental principle and decided on a figure which didn't reflect the value paid for.

$35,000 is the cash value and should be recorded as the vlue of the building.