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

Cost of the land = $60,000 + $3,000 + $3,500 + $3,500 = $70,000

As the option premium was paid, it is a cost so all the option premium will get added to the cost (for two options, it expires unexercised). For the option where-in the land was purchased, $3,000 was paid as option premium and the contract was exercised by paying $60,000

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