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9E

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 478

Short Answer

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.

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

See the step by step solution

Step by Step Solution

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:

Thus, net income is $5,800.

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Robots, Inc. Robots, Inc. reported the following information regarding 2016–2017 inventory. Robots, Inc. 2017 2016 Current assets Cash $ 153,010 $ 538,489 Accounts receivable, net of allowance for doubtful accounts of $46,000 in 2017 and $160,000 in 2016 1,627,980 2,596,291 Inventories (Note 2) 1,340,494 1,734,873 Other current assets 123,388 90,592 Assets of discontinued operations — 32,815 Total current assets 3,244,872 4,993,060 Notes to Consolidated Financial Statements Note 1 (in part): Nature of Business and Significant Accounting Policies Inventories—Inventories are stated at the lower-of-cost-or-market. Cost is determined by the last-in, first-out (LIFO) method. Note 2: Inventories consist of the following. 2017 2016 Raw materials $1,264,646 $2,321,178 Work in process 240,988 171,222 Finished goods and display units 129,406 711,252 Total inventories 1,635,040 3,203,652 Less: Amount classified as long-term 294,546 1,468,779 Current portion $1,340,494 $1,734,873 Inventories are stated at the lower of cost determined by the LIFO method or market for Robots, Inc. If the FIFO method had been used for the entire consolidated group, inventories after an adjustment to the lower-of-cost-ormarket would have been approximately $2,000,000 and $3,800,000 at October 31, 2017 and 2016, respectively. Inventory has been written down to estimated net realizable value, and results of operations for 2017, 2016, and 2015 include a corresponding charge of approximately $868,000, $960,000, and $273,000, respectively, which represents the excess of LIFO cost over market. Inventory of $294,546 and $1,468,779 at October 31, 2017 and 2016, respectively, shown on the balance sheet as a noncurrent asset represents that portion of the inventory that is not expected to be sold currently. Reduction in inventory quantities during the years ended October 31, 2017, 2016, and 2015 resulted in liquidation of LIFO inventory quantities carried at a lower cost prevailing in prior years as compared with the cost of fiscal 2014 purchases. The effect of these reductions was to decrease the net loss by approximately $24,000, $157,000, and $90,000 at October 31, 2017, 2016, and 2015, respectively. Instructions (a) Comment on why Robots, Inc., might disclose how its LIFO inventories would be valued under FIFO. (b) Why does the LIFO liquidation reduce operating costs? (c) Comment on whether Robots, Inc. would report more or less income if it had been on a FIFO basis for all its inventory

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