Lorna Smith decided to start her own CPA practice as a professional corporation, Smith CPA PC. Her corporation purchased an office building for $35,000 that her real estate agent said was worth $50,000 in the current market. The corporation recorded the building as a $50,000 asset because Lorna believes that is the real value of the building. Which of the following concepts or principles of accounting is being violated?

A) cost principleB) economic entity assumptionC) monetary unit assumptionD) going concern assumption

The correct answer is A) cost principle.

Explanation:

According to the cost principle, the acquired assets and services must be recorded at their actual cost (also called historical cost). Although the buyer thinks that he obtained a bargain, the good is recorded with the price paid in the transaction, not at its "expected" cost. Assume that your sound equipment store acquires equipment from a vendor in liquidation. Consider also that the transaction is a bargain and pay just $ 2,000 for the equipment that would normally have cost you $ 3,000. The cost principle needs to record the actual cost of $ 2,000, not the $ 3,000 that the equipment is worth.