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15 February, 15:02

Taylor Company purchased a piece of equipment for $2,000 several years ago. It would cost $4,000 to replace that piece of equipment. A. The equipment should be recorded at $4,000 in the accounting records because that is the replacement cost. B. The company can choose whether to report the equipment at $2,000 or $4,000. C. The equipment should be recorded at $2,000 in the accounting records because that was the exchange price. D. None of the above are correct.

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  1. 15 February, 17:20
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    C. The equipment should be recorded at $2,000 in the accounting records because that was the exchange price.

    Explanation:

    The equipment should simply be recorded at $2,000. For example, if it was paid in cash, the journal entry would be:

    Account Debit Credit

    Equipment $2,000

    Cash $2,000

    The fact that it would cost $4,000 to replace it does not mean that it will be replaced. It is only a hypothetical scenario that should not be recorded in the accounting journal, because it does not reflect economic reality.
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