On Cursor Corporation's balance sheet, a large tract of company-owned land is reported at its original cost of $50,000. The owner of the company is upset, because he thinks the land's true value is ten times that amount. He fears the low-cost figure may hurt the company as it tries to raise additional capital in the future.
The owner understands that generally accepted accounting principles (GAAP) require land to be recorded at the amount paid to purchase the land. Therefore, he hatches a plan to sell the land to his wife for $50,000, and then, six months later, have her give it back to the company in exchange for $500,000 of company stock. In this way, the land will be reported on the balance sheet at the higher figure of $500,000.
Based on this information, answer the following:
1- Describes the owner's plan, in terms of the ten accounting concepts (Economic entity, Going Concern, Stable Monetary Unit, Accountable Periods, Historical cost, Revenue Recognition, Matching, Full Disclosure, Materiality, and Conservatism). Which concepts apply to this scenario?
2- Should the owner proceed with the plan? Why or why not?
The concepts that apply are historical cost, materiality, and full disclosure. Historical cost is the original cost of the land and the transaction is designed to suppress this concept by using a related party to create a transaction with no economic substance. The related party transaction is material (materiality), meaning it has a large impact ...
Your response is 192 words and indicates that three of the concepts are applicable. The owner should not proceed and this is explained along with a suggestion to use instead.