Question

If a company is considering the purchase of a parcel of land that was acquired by the seller for $85,000, is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by the purchaser as easily being worth $140,000, and is purchased for $137,000, the land should be recorded in the purchaser's books at:
a. $95,000.
b. $137,000.
c. $138, 500.
d. $140,000.
e. $150,000

Answer 1

Answer:

b. $137,000.

Explanation:

The accounting equation is one that shows the relationship between all the elements of a balance sheet namely; assets, liabilities and owner's equity.

For an entity that purchased a parcel of land (asset) for $85,000 and sold for $137,000, the  company that sold the land for $137,000 will derecognize the land and the associated cost while the company that purchased it at $137,000 will recognize it at cost.

The accounting standard IAS 16 requires that the initial recognition of assets should be at cost.

Hence the right answer is b. $137,000.