Sell Soon Inc

Case (Project Sell Soon Inc)

Sell Soon Inc.

This case is about a company called Sell Soon Inc. this is a manufacturing company that operates two widget manufacturing facilities in the United States. One is located in New Orleans Louisiana and the other facility is located in Houston Texas. The company is going through restructuring and one part of the restructuring plan is the disposition of the Houston division through consolidation. When the restructuring is complete all of the Sell Soon Ink's manufacturing will be done from the New Orleans facility. The Houston facility currently has a book value of $ 20 million and it has a fair market value of $ 25 million. Sell Soon Inc expects to incur two million dollars to dispose the Houston facility and combine the manufacturing work into one location. The two million dollar cost is broken down in two parts that is one million dollar will be spent before the disposal and the combination of the two facilities takes place and the rest is allocated as selling cost of the Houston facility. The selling costs will be incurred only if the sale of the Houston manufacturing division goes through. Therefore, the accounting issue in this case is that how should Sell Soon Inc account for the one million dollars it will be spending before disposing the Houston facility and given the company expects that there will be a gain on this disposal.

Sell Soon Inc. should account for the one million dollar cost of disposal by capitalizing the cost. According to EITF issue No. 90-8 "Costs should be capitalized if the costs are incurred in preparing for sale that property currently held for sale." So, in this case we are told in the case that "held for sale" criteria in paragraph 30 of FASB statement No. 144 are met. In order to dispose the Houston facility Sell Soon Inc. has to incur different costs to get the facility ready for sale. More over, Sell Soon Inc. has met the following criteria that are outlined in FASB 144. If a long lived asset is to be disposed of by sale and the property is classified as "held for sale" these criteria has to be met: management commits to plan to sell the asset, management commits to plan to sell the asset, in this case management at Sell Soon Inc is committed to sell this asset, the asset is available for immediate sale in its present condition, active program to locate a buyer has been initiated, in Sell Soon's case they have actually found a buyer but there was no contract signed . Sale is probable within one year, in this case yes; disposal is expected to occur in nine months. The asset is being actively marketed for a reasonable price and it is unlikely that the plan to sell will be changed. All the criteria listed above, which is the criteria set by FASB No. 144 has been met in this case and the asset is classified as "held for sale" so Sell Soon Inc cannot depreciate the Houston facility. The one million dollar "cost to sell" the company will be incurring before hand might include advertisement costs to sell the facility, property tax and other costs to improve or get the property ready for sale. Also, these costs could include incremental direct costs to transact the sale such as broker commissions, legal and title transfer costs and closing costs to maintain and or protect the asset, things such as, security, utility expense and insurance. If it takes more than a year to conclude the sale then the cost to sell are discounted to present in special circumstances. In Sell Soon Inc's case the disposal is expected to take place in less than a year's time (nine months) that means the one million dollar cost to sell