JT Engineering constructs a parking garage at a cost of $40,000. Unfortunately,

Question

JT Engineering constructs a parking garage at a cost of $40,000. Unfortunately, the present economic usefulness of the facility is only $30,000. Under the prudent cost concept, how should JT account for this $10,000 difference?

A : It should charge the $10,000 difference as revenue to the current period.

B : It should simply ignore the $10,000 difference.

C : It should charge the $10,000 difference as a loss to the current period.

D : It should capitalize the $10,000 difference to the cost of the asset.

Explanation / Answer

C : It should charge the $10,000 difference as a loss to the current period.

The prudent cost concept states that if a company is unaware of an asset's true value, and overpays for it, the company should capitalize the true value of the asset and take a loss on the excess cost in the current accounting period.

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