Reference no: EM132565522

Question - The following information is provided for two items of property for a company.

Property A was purchased five years ago for $400 000. It was intended to be used to build another factory but the company has now reorganised its original factory and it is no longer required. The company now intends to sell it. The current property market has dropped but is expected to rise when interest rates fall. If sold now the property is expected to realise $360 000. Real estate experts have predicted that if the company waits for the property market to recover, it could realise $450 000.

Property B is the current factory. It was purchased ten years ago for $200 000. If sold now, it would be expected to realise $380 000 (and $500 000 if the property market recovers). The company has various estimates about its contribution to the profit of the company. Using current interest rates and various assumptions about future sales and costs, the property is calculated to have a present value (in terms of future cash flows) of $900 000. It is insured for $600 000 because this is the cost required to rebuild it.

The company has always recorded property using the historic cost basis. Other companies in the same industry have traditionally used the same basis, although about 40 per cent now use the fair value basis.

Required -

(a) For each of the properties identify which cost or value would best meet each of the following qualitative characteristics of:

faithful representation

relevance

verifiability

comparability

understandability

(b) For each of the properties, choose which cost or value should be stated in the financial statements. Explain why you have chosen it and how you balanced the qualitative characteristics.

(c) For Property B, which cost or value would be preferred if the company wants to report higher earnings? Justify your answer.