Question

High on the Hog Company operates large swine feedlots in Iowa, Illinois, and Missouri. The company planned to expand its operations and purchased 160 acres near Rankin, Illinois, on which to build a new large-scale swine lot. The cost of the acreage was $618,000 and construction costs of $234,000 had been incurred when it scrapped the project. Due to negative public sentiment and the high probability that new state laws would be enacted to prohibit operating on the lot, High on the Hog Company sold the facility for $580,000. In a letter to the Board of Directors explain the accounting consequences of the actions described above. Be thorough and include adequate professional support.

Answer 1

To the Board,

Towards the expansion plan, the company has acquired 160 acres near Rankin, Illinois for $618000 and done construction worth $234000 for opening the new large-scale swine lot.

Due to negative public sentiments and the adverse new state laws, which could be enacted in short period, would be prohibiting the operation on the lot. After due delegation of the management decision to dismantle the expansion plan and the construction on the land is totally worthless, the company has sold out the land for best offer received ie. $580000.

That is why, consequentially, the company has been recording a loss of $272000 (ie. 618000+234000-580000) in the current financial year.

The submission has been made for the approval of the Board.

Management