Case Scenario:
You have been working as a professional accounting trainee for about three months when the accountant for your client, Portables Inc., asks for your input about two transactions that took place in the current year. Portables, Inc., which used to be wholly owned and managed by Angus Dickson, now has 12 shareholders and a sizeable bank loan. Mr. Dickson still owns a majority of the outstanding shares. The accountant is in the process of finalizing the company's financial statements for the year ended June 30, 2008. Your are working on the year-end audit and will also prepare the company's tax return.
Situation 1:
Management found three suitable sites for a new plant facility, each site with a unique advantage. In order to ensure that there was time to thoroughly investigate the advantages and disadvantages of each site, one-year options were purchased for an amount equal to 6% of the contract price of each site. The costs of the options cannot be applied against the contracts and are not refundable. Before the options expired, one of the sites was purchased at the contract price of $200,000. The option on this site cost $12,000. The two options that were not exercised had cost $8,000 each.
Instructions:
Present arguments in support of recording the land cost at each of the following amounts: (a) $200,000, (b) $212,000, and (c) $228,000. What would you advise?
Situation 2:
Portables, Inc. operates a very successful automobile dealership and has been increasing its real estate holdings. The accountant tells you that the company has just purchased a rental property for $200,000. "The municipal assessment indicates that the land itself is worth about half that amount, but I want you to allocate no more than 10% of the purchases price to the land. We all know that land isn't deductible for tax purposes! The building was in poor condition, so a new roof was put on, a new furnace installed, the structure was completely rewired, and the whole place was painted. These are just maintenance expenses, aren't they?"
You know that recognizing as many expenses as possible for your client will lead to a better tax position for the company, lower cash outflows, and higher share value.
Instructions:
Identify the relevant issues and explain how you should handle this situation.