On January 1, 2012, Peet Development Company paid $325,000 in cash for a parcel

Question

On January 1, 2012, Peet Development Company paid $325,000 in cash for a parcel of land to be used as the new office building site. During March, the company petitioned the city council to rezone the area for professional office buildings. The city council refused, preferring to maintain the area as a residential zone. After nine months of negotiation, Peet Development convinced the council to rezone the property for commercial use, thus raising its value to $475,000. For accounting purposes, what value should be used to record the transaction on January 1, 2012? At what value would the property be reported at year-end, after the city council rezoning? Explain why accountants use historical costs to record transactions

Explanation / Answer

On January 1, 2012, Peet Development Company paid $325,000 in cash for a parcel of land to be used as the new office building site. During March, the company petitioned the city council to rezone the area for professional office buildings. The city council refused, preferring to maintain the area as a residential zone. After nine months of negotiation, Peet Development convinced the council to rezone the property for commercial use, The value to record the transaction on January 1 should be $325,000. After the rezoning, following the historical cost principle, the property should still be reported as $325,000. Accountants use historical costs to record transactions because the historical cost principle follows the accounting quality of reliability since everyone can agree on the original purchase price of an asset. When an asset is appraised, different groups might arrive at different values, but no one can argue what the original cost was to get the asset.

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