Case 9-5 Financial Accounting

04/02/2012

Week 2 Team B Assignment

Case 9-5 what should the purchase price of the land be? How should you account for the options purchased? Explain your reasoning.

Your client found three suitable sites, each having certain unique advantages, for a new plant. To thoroughly investigate the advantages and disadvantages of each site, one-year options were purchased for an amount equal to 5 percent of the contract price of each site. The costs of the options cannot be applied against the contracts. Before the options expire, one of the sites was purchased at the contract price of $60,000. The option on this site had cost $3,000. The two options not exercised had cost $3,500 each.

A. $60,000

B. $63,000

C. $70,000

Team B came up with the answer b. The general answer is to account for the initial amount of the purchase ($60,000) plus any cost to bring the land ($3,000), building or real estate up to standards to be able to start using it. The easy answer would be if we were talking about renovations, land clearing or additions added prior to use. The problem is that the question poses an expense that isn’t directed to physical construction to the asset (site). Looking under FASB 360-10-30-1 it talks about measuring at the beginning. It states:

Paragraph 835-20-05-1 states that the historical cost of acquiring an asset includes the costs necessarily incurred to bring it to the condition and location necessary for its intended use. As indicated in that paragraph, if an asset requires a period of time in which to carry out the activities necessary to bring it to that condition and location, the interest cost incurred during that period as a result of expenditures for the asset is a part of the historical cost of acquiring the asset.

The next section 30-2 mentions to see glossary for definition of activities that count towards bringing the asset to necessary condition. Unfortunately it doesn’t mention contract prices. It talks more about development...