Question

What is violated here?

Pastel Paint Company purchased land two years ago at a price of $250,000. Because the value of the land has appreciated to $400,000, the company has valued the land at $400,000 in its most recent balance sheet.

Answer 1

The Historical Cost Principle has been violated by Pastel Paint Company as they revalued land to its market value instead of its purchase cost in the balance sheet.

Step-by-step explanation:

The question relates to accounting principles, specifically the Historical Cost Principle. Pastel Paint Company has violated this principle by revaluing their land from the original purchase price of $250,000 to its current market value of $400,000 on the balance sheet.

According to this principle, assets should be recorded at their cost at the time of acquisition and not adjusted upwards for increases in market value. This is a fundamental rule in generally accepted accounting principles (GAAP), which helps provide consistency, comparability, and reliability in financial statements.