Question 5ISTQ - Intermediate Accounting (Kieso)

Question

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense. 

(b) property, plant, and equipment. 

(c) an intangible asset. 

(d) a long-term investment.

Step-by-Step Solution

Answer

The correct option is (d) a long-term investment.

Definition of Investment

Investment can be defined as the resource held to generate capital gain. It includes any fixed asset such as land or any other asset.

The Explanation for Correct Option

Land will be reported as a long-term investment because it will remain idle for five years, and it might be possible that the company will sell such land to generate  capital gain.

The Explanation for Incorrect Options

(a) Land acquired by the business entity is an asset, not an expense; therefore, this option is incorrect.

(b) Land cannot be reported in property, plant, and equipment because the land will remain idle for five years.

(c) Land has physical existence and therefore cannot be reported as an intangible asset.