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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Morgan Company was planning to expand its production facilities. Therefore, it acquired 1-year options to purchase two alternative sites. Each option cost $5,000 and could not be applied against the contract. One of the sites was bought for $100,000. Morgan was unsure whether to capitalize the land at $100,000, $105,000, or $110,000.

Required:

Write a short report that presents arguments in favor of each alternative.

To determine

Write a short report presenting arguments in support each alternative.

Explanation

Capitalize at $100,000:

  • The option costs cannot be applied to the purchase price and are, consequently, not a cost of the land. Relatively, they are an expense incurred during the year that are necessary to make a decision and must not be capitalized.
  • Its usefulness has expired and must not be capitalized because the option was only for the period of one year.

Capitalize at $105,000:

  • The option cost of $5,000 is required to acqui...

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