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.