The Cost Principle
Response to the following problem:
On January 1, 2009, Save-More Construction Company paid $150,000 in cash for a parcel of land to be used as the site of a new office building. 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, SaveMore Construction convinced the council to rezone the property for commercial use, thus raising its value to $200,000.
For accounting purposes, what value should be used to record the transaction on January 1, 2009? 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.