Hugh Gordon Real Estate Investor and Manager

Hugh Gordon is a real estate developer with several properties located throughout Victoria, BC. Although Mr. Gordon sells most properties upon completion, in some instances he arranges to purchase the property either by himself or in a partnership with other investors.

During the current year, Mr Gordon was involved in two residential rental properties. The first property was purchased solely by Mr. Gordon. It is operated as a proprietorship and as such 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 income and his income tax liability.

The second property owned is very similar in nature to the property owned by Mr. Gordon; but it is owned by a group of professionals living in St. Johns. They have purchased the property as an investment an hired Mr. Gordon to be the property manager. The group is very concerned with earning a good return on the investment, and consequently Mr. Gordons compensation is based upon the propertys profitability.

During the year, both properties required that new parking lots be constructed. Both new parking lots are significant improvements to the properties in that previously vehicles parked on a large unlit gravel area whereas they are now paved, lighted and have security systems.

Required:

a) In discussions with Mr. Gordon, 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. Identify and discuss his rationale for wanting these accounting treatments.

b) Discuss and recommend the options and the appropriate accounting treatment for the costs of both parking lots? Include a discussion of capitalization as well as amortization.

It is recommended that you use the critical thinking flow chart and case analysis to complete this study, including: 1) Identify the users and the objectives 2) Identify the accounting policies/principles involved 3) Outline the options, and the implications of each 4) Analyze the options and provide a recommendation

Please provide three possible options and choose the best option as the recommendation. Explain why this option was chosen and the other two were not.