The Green Tomato purchased a parcel of land six years ago for $299,500. At that

Question

The Green Tomato purchased a parcel of land six years ago for $299,500. At that time, the firm invested $64,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $28,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $355,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?

Explanation / Answer

The value should be included in the initial cost is its total cost which is born by the company & in addition to this other expenses which are incurred to get ready to put to use is also included in the cost of asset. so here cost will be 299500 + 64000 i.e 363500$ .

As current value of asset is $355000 which is lesser than cost of asset, if its value decreased is because of some permanent nature than as per general accounting principles it must be included at $355000, & as value is relevant to analyse this project .so historical cost is irrelevant in this case.

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