The following information is provided for two items of property for the ColourWheel Company. 

• Property A was purchased five years ago for $450,000. It was intended to be used to build a new factory, but the company has now reorganized its original factory and it no longer is required. ColourWheel intends to sell Property A. The current property market has dropped but is expected to rise when the market recovers from COVID-19. If sold now, the property is expected to realise $390,000. Real estate experts have predicted that if the company waits for the property market to recover, it would realise $490,000.

• Property B is the current factory. It was purchased ten years ago for $200,000. If sold now, it would be expected to realise $380,000 (and $500,000 if the property market recovers). The company has various estimates about its contribution to the profit of the company. Using current interest rates and various assumptions about future sales and costs, the property is calculated to have a present value (in terms of future cash flows) of $900,000. It is insured for $600,000 because this is the cost required to rebuild it.

The company has always recorded property using the historic cost basis. Other companies in the same industry have traditionally used the same basis, although about 40% now use the fair value basis.

Required:

1. For each of the properties, identify which cost or value would best meet each of the following qualitative characteristics (consider each separately) of:

> Faithful representation

> Verifiability

> Comparability

> Understandability

> Relevance

2. For each of the properties, consider which option would provide the highest quality accounting information. Explain why.

3. Do you think everyone would agree with your choices? Why or why not?

Answer rating: 100% (QA)

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