Question

On July 1, year 1, Link Development Company purchased a tract of land for $900,000. Additional costs of $150,000 were incurred in subdividing the land during July through December year 1. Of the tract acreage, 70% was subdivided into residential lots as shown below and 30% was conveyed to the city for roads and a park.

Lot class	Number of lots	Sales price per lot
A	100	$12,000
B	100	8,000
C	200	5,000

Under the relative sales value method, the cost allocated to each Class A lot should be

the answer is $4,200.

Please explain in detail please, thank you.

Answer 1

Answer: $4200

Solution:

Total cost to be allocated = $900000 + $105000 = $1050000

Lot class	Number of lots (a)	Sales price per lot (b)	Total sales value (a*b)	Ratio of allocation	Allocation	Cost allocated to each lot (a/c)
A	100	$12000	$1200000	0.4 [$1200000/$3000000]	$420000	$4200
B	100	$8000	$800000	0.266666667 [$800000/$3000000]	$280000	$2800
C	200	$5000	$1000000	0.333333333 [$1000000/$3000000]	$350000	$1750
			$3000000	1	$1050000

Note: The 30% land allocated to city roads and parks is not considered for total cost allocation, i.e. the the total cost of $1050000 is not allocated to 30% land, entire cost is allocated to 70% land used for residential lots. This is because total cost is allocated to only the revenue generating units.The 30% land is not separately used for selling.