Eagle Ridge, Inc. was in the final phase of completing a land development project it started earlier in the year. Eagle Ridge, Inc. had acquired 100 acres of raw land for $250,000 and then spent an additional $1,650,000 in land development costs to create a new subdivision with 200 residential lots. With a total cost of $1,900,000 and 200 lots, each lot had a cost of $9,500; however, the lots were listed for sale at $32,000 per lot. Eagle Ridge, Inc. was applying for a business loan and needed to provide current financial statements to the bank. Jill Hamilton, the company president, wanted to include the total current value of the lots, $6,400,000 (200 lots x $32,000 per lot), rather than the total cost currently listed on the statement of financial position, $1,900,000. Dave Jamison, the company accountant, told Jill that the lots were inventory and the cost principle required that they be included on the statement of financial position at the $1,900,000 rather than the fair market value. Furthermore, even though the lots were listed for sale at $32,000 each, there was no guarantee that they would actually all sell at this value, and according to the objectivity principle, the more reliable cost figure should be used for this reason, too.
Is the accountant right about recording the lots using historical cost? What alternative approaches could be used to measure the cost of assets? Should the statement of financial position for Eagle Ridge, Inc. list the lots at their total cost of $1,900,000 or their total selling price of $6,400,000? If Eagle Ridge, Inc. records the realizable value of the assets, where should this unrealized gain be reported?

  • CreatedJuly 08, 2015
  • Files Included
Post your question