'Ice-cream R Us' Ltd. just purchased a block of land, on which it will build a new factory for its operations. 'Ice-cream R Us' paid $500,000 cash to the land owner. An independent evaluation reveals that the land is worth $550,000. Using historical cost as a measurement base, how should 'Ice-cream R Us' recognise the land purchase in its financial statements?
A) $500,000 recognised as an asset (land).
B) $550,000 recognised as an asset (land).
C) $500,000 recognised as an asset (land) and $50,000 as a liability.
D) The land should not be recognised as an asset as it cannot be measured with reliability.

Question

Quizplus · Accepted Answer

According to historical cost as a measurement base, the land should be recognised at the cost it was acquired for, which is $500,000 in cash paid by 'Ice-cream R Us' to the land owner. The independent evaluation revealing a higher value of $550,000 does not affect the recognition of the land as an asset.

'Ice-Cream R Us' Ltd