Steel City Company (SCC) paid $120,000 to purchase land that it planned to use as a future building site. A short time later the Company was approached with an opportunity to purchase a better property. The new property cost $125,000. After considering the alternative SCC decided to reject the offer because the Company would be required to sell the original site for $119,000 thereby incurring a $1,000 loss on the disposal of the land ($120,000 - $119,000).Based on this information
a. the $1,000 loss is relevant to the decision.
b. the $119,00 current market value of original site is relevant to the decision.
c. the $125,000 cost of the replacement property is not relevant to the decision.
d. the $5,000 difference between the cost of the two properties ($125,000 - $120,000) is relevant to the decision.

Question

09-12-2019
Business

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Steel City Company (SCC) paid $120,000 to purchase land that it planned to use as a future building site. A short time later the Company was approached with an opportunity to purchase a better property. The new property cost $125,000. After considering the alternative SCC decided to reject the offer because the Company would be required to sell the original site for $119,000 thereby incurring a $1,000 loss on the disposal of the land ($120,000 - $119,000).Based on this information
a. the $1,000 loss is relevant to the decision.
b. the $119,00 current market value of original site is relevant to the decision.
c. the $125,000 cost of the replacement property is not relevant to the decision.
d. the $5,000 difference between the cost of the two properties ($125,000 - $120,000) is relevant to the decision.

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jepessoa jepessoa · Answer 1 · 2019-12-11T03:47:54+01:00

Answer:

B) the $119,00 current market value of original site is relevant to the decision.

Explanation:

Relevant information is information that affects present or future conditions and differ among the alternatives.

The $1,000 loss is based on a sunk costs, and sunk costs are not relevant in the decision making process. The $5,000 difference is also based on sunk costs and therefore is not relevant either.

The only two costs relevant to this decision are the current market value of the property ($119,000) and the value of the second property, $125,000.