9E - Intermediate Accounting (Kieso)

Question

Phil Collins Realty Corporation purchased a tract of unimproved land for \(55,000. This land was improved and subdivided into building lots at an additional cost of \)34,460. These building lots were all of the same size but owing to differences in location were offered for sale at different prices as follows. Group No. of Lots Price per Lot 1 9 \(3,000 2 15 4,000 3 17 2,400 Operating expenses for the year allocated to this project total \)18,200. Lots unsold at the year-end were as follows. Group 1 5 lots Group 2 7 lots Group 3 2 lots Instructions At the end of the fiscal year Phil Collins Realty Corporation instructs you to arrive at the net income realized on this operation to date.

Step-by-Step Solution

Answer

The net income at the year-end equals $5,800.

Calculation of total cost of land

Calculation of total cost is as follows: 

Calculation of cost per lot

Groups	No. of Lots	Sales Price Per Lot	Total Sales Price	Relative Sales Price	Total Cost	Cost Allocated to Lots	Cost Per Lot
Group 1	9	$3,000	$27,000	27000/127800	$89,460	$18,900	$2,100
Group 2	15	4,000	60,000	60000/127800	89,460	42,000	2,800
Group 3	17	2,400	40,800	40800/127800	89,460	28,560	1,680
Total			$127,800

Calculation of gross profit

Groups	No. of Lots	Unsold Lots	Sold Lots	Cost per Lot	Cost of Lots Sols	Sales	Gross Profit
Group 1	9	5	4	$2,100	$8,400	$12,000	$3,600
Group 2	15	7	8	2,800	22,400	32,000	9,600
Group 3	17	2	15	1,680	25,200	36,000	10,800
Total					$56,000	$80,000	$24,000

Calculation of net income

Net income is calculated as follows: 

$\begin{array}{rcl}\mathrm{Net} \mathrm{income}& =& \mathrm{Gross} \mathrm{profit}-\mathrm{Operating} \mathrm{expenses}\\ & =& \$24,000-\$18,200\\ & =& \$5,800\end{array}$

Thus, net income is $5,800.