The cost principle (historical cost principle) states that assets should be recorded at their original purchase price, regardless of changes in market value.
Correct Answer (B - A Building Purchased Last Year for $1 Million Is Still Reported at $1 Million, Despite an Increase in Value)
Under the cost principle, assets remain recorded at their historical cost, not adjusted for market fluctuations.
The only exception is for certain financial instruments, such as trading securities, which are reported at fair market value.
The IIA Practice Guide: Auditing Financial Reporting and Accounting Estimates states that fixed assets (such as buildings) should be recorded at cost unless an impairment occurs.
Why Other Options Are Incorrect:
Option A (Trading and Investment Securities Reported at Market Cost):
Securities can be reported at market value, but this does not follow the cost principle, which applies to tangible assets.
Option C (Adjusting the Building's Value to $1.2 Million):
Violates the cost principle—historical cost does not change due to market appreciation.
Option D (Reporting Assets at Either Historical or Fair Value):
This is not the cost principle; it describes fair value accounting, which is different.
IIA Practice Guide: Auditing Financial Reporting and Accounting Estimates – Defines the cost principle and asset valuation rules.
Generally Accepted Accounting Principles (GAAP) – Requires fixed assets to be recorded at historical cost.
Step-by-Step Explanation:IIA References for Validation:Thus, B is the correct answer because the cost principle requires assets to be recorded at their original purchase price, regardless of market value changes.
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