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Chapter 9: 9E (page 478)

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.

Short Answer

Expert verified

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

Step by step solution

01

Calculation of total cost of land

Calculation of total cost is as follows:

02

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

03

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

04

Calculation of net income

Net income is calculated as follows:

Netincome=Grossprofit-Operatingexpenses=$24,000-$18,200=$5,800

Thus, net income is $5,800.

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Most popular questions from this chapter

Question:What method(s) might be used in the accounts to record a loss due to a price decline in the inventories? Discuss

Accounting, Analysis, and Principles Englehart Company sells two types of pumps. One is large and is for commercial use. The other is smaller and is used in residential swimming pools. The following inventory data is available for the month of March. Units Price per Unit Total Residential Pumps Inventory at Feb. 28: 200 \( 400 \) 80,000 Purchases: March 10 500 \( 450 \)225,000 March 20 400 \( 475 \)190,000 March 30 300 \( 500 \)150,000 Sales: March 15 500 \( 540 \)270,000 March 25 400 \( 570 \)228,000 Inventory at March 31: 500 Commercial Pumps Inventory at Feb. 28: 600 \( 800 \)480,000 Purchases: March 3 600 \( 900 \)540,000 March 12 300 \( 950 \)285,000 March 21 500 \(1,000 \)500,000 Sales: March 18 900 \(1,080 \)972,000 March 29 600 \(1,140 \)684,000 Inventory at March 31: 500 In addition to the above information, due to a downturn in the economy that has hit Englehart’s commercial customers especially hard, Englehart expects commercial pump prices from March 31 onward to be considerably different (and lower) than at the beginning of and during March. Englehart has developed the following additional information. Commercial Pumps Residential Pumps Net realizable value (per unit) \(900 \)580 The normal profit margin is 16.67% of cost. Englehart uses the FIFO accounting method. Accounting (a) Determine the dollar amount that Englehart should report on its March 31 balance sheet for inventory. Assume Englehart applies lower-of-cost-or-net realizable value at the individual product level. (b) Repeat part (a) but assume Englehart applies lower-of-cost-or-net realizable value at the major categories level. Englehart places both commercial and residential pumps into the same (and only) category. Analysis Which of the two approaches above (individual product level or major categories) for applying LCNRV do you think gives the financial statement reader better information? Principles Assume that during April, the net realizable value of commercial pumps rebounds to $1,050. (a) Briefly describe how Englehart will report in its April financial statements the inventory remaining from March 31. (b) Briefly describe the conceptual trade-offs inherent in the accounting in part (a).

In its 2015 annual report, Gap Inc. reported inventory of \(1,889 million on January 31, 2015, and \)1,928 million on February 1, 2014, cost of goods sold of \(10,146 million for 2015, and net sales of \)16,435 million. Compute Gap’s inventory turnover and the average days to sell inventory for the fiscal year 2015

Wallace Company lost most of its inventory in a fire in December just before the year-end physical inventory was taken. The corporation’s books disclosed the following. Beginning inventory \(170,000 Sales revenue \)650,000 Purchases for the year 390,000 Sales returns 24,000 Purchase returns 30,000 Rate of gross profi t on net sales 40% Merchandise with a selling price of \(21,000 remained undamaged after the fire. Damaged merchandise with an original selling price of \)15,000 had a net realizable value of $5,300. Instructions Compute the amount of the loss as a result of the fire, assuming that the corporation had no insurance coverage.

Fiedler Co. follows the practice of valuing its inventory at the lower-ofcost-or-market. The following information is available from the company’s inventory records as of December 31, 2017. Item Quantity Unit Cost Replacement Cost/Unit Estimated Selling Price/Unit Completion & Disposal Cost/Unit Normal Profit Margin/Unit A 1,100 \(7.50 \)8.40 \(10.50 \)1.50 $1.80 B 800 8.20 7.90 9.40 0.90 1.20 C 1,000 5.60 5.40 7.20 1.15 0.60 D 1,000 3.80 4.20 6.30 0.80 1.50 E 1,400 6.40 6.30 6.70 0.70 1.00Instructions Greg Forda is an accounting clerk in the accounting department of Fiedler Co., and he cannot understand why the market value keeps changing from replacement cost to net realizable value to something that he cannot even figure out. Greg is very confused, and he is the one who records inventory purchases and calculates ending inventory. You are the manager of the department and an accountant. (a) Calculate the lower-of-cost-or-market using the individual-item approach. (b) Show the journal entry he will need to make in order to write down the ending inventory from cost to market. (c) Write a memo to Greg explaining what designated market value is as well as how it is computed. Use your calculations to aid in your explanation
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