Your client found three suitable sites, each having certain unique advantages, f

Question

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 pruchased 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.

Present arguments in support of recording the cost of the land at each of the following amounts:

A. $60,000

B. $63,000

C. $70,000

Explanation / Answer

Answer:B $63000

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.

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