Property Awas purchased five years ago for $800,000. It was intended to be used to build another factory, but the company has now re-organized its original factory and it is no longer required. The company now intends to sell it. The current property market has dropped but is expected to rise when interest rates fall. If sold now the property is expected to realize $720,000. Real estate experts have predicted that if the company waits for the property market to recover, it could realize $900,000.

Property Bis the current factory. It was purchased ten years ago for $400,000. If sold now, it would be expected to realize $760,000 (and $1,000,000 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, theproperty is calculated to have a present value (in terms of future cash flows) of $1,800,000. It is insured for $1,200,000 because this is the cost required to rebuild it.

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

Question 3(a)

Foreach of the propertiesabove, identify which cost would best meet the criteria of relevance, faithful representation, understandability, comparability and verifiability (consider each qualitative characteristic separately). Explain your answers clearly.