Hugh White is a real estate developer with several properties located throughout St. John's, Newfoundland. Although Mr. White sells most properties upon completion, in some instances he arranges to purchase the property either by himself or in a consortium with other investors.
During the current year, Mr. White was involved in two residential rental properties. The first property was purchased solely by Mr. White. Because it is operated as a proprietorship, he pays personal income taxes on any profits earned by this property. Consequently, he has a strong incentive to maximize expenses on this property in order to minimize its net earnings and his income tax liability.
The second property is very similar in nature to the property owned by Mr. White, but is owned by a group of professionals living in St. John's. They have purchased the property as an investment and hired Mr. White to be the property manager. The group is very concerned with earning a good return on the investment, and consequently Mr. White's compensation is based upon the property's profitability.
During the year, both properties required that new parking lots be constructed. Both new parking lots are significant improvements to the properties, since they are now paved and lighted and have security systems.
Required:
a. In discussions with Mr. White, you discover that he would like to capitalize the costs of the parking lot for which he is the property manager and expense the costs of the parking lot for his own building. What is his rationale for wanting these accounting treatments?
b. What is the appropriate accounting treatment for the costs of both parking lots?