Question

Huntington Partnership purchased an option to buy 400 acres in northern California for $500,000. The option would allow Huntington to buy the property for $10,000,000 for a period of one year.

If Huntington does NOT buy the 400 acres and so the option expires (resulting in a loss of the $500,000), what is the treatment of the $500,000? (

Answer 1

Ans) The above option cost $500,000 is a pure expense. It will be simply treated as an option expense and straight away transfered to the Profit & Loss Statement.

Reason: The above purchase option cost was incurred during the year was for making a decision and its usefulfulness has expired after the expiry of 1 year. Even though the decision to purchase the land has been executed, the option cost does not form part of the Cost of Land because they are just an expense incurred during the year required simply to make decision and hence should not never be capitalised.