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In: Accounting

National Bank has several departments that occupy both floors of a two-story building. The departmental accounting...

National Bank has several departments that occupy both floors of a two-story building. The departmental accounting system has a single account, Building Occupancy Cost, in its ledger. The types and amounts of occupancy costs recorded in this account for the current period follow.
  

Depreciation—Building $ 31,500
Interest—Building mortgage 47,250
Taxes—Building and land 14,000
Gas (heating) expense 4,375
Lighting expense 5,250
Maintenance expense 9,625
Total occupancy cost $ 112,000


The building has 7,000 square feet on each floor. In prior periods, the accounting manager merely divided the $112,000 occupancy cost by 14,000 square feet to find an average cost of $8 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupied.

Diane Linder manages a first-floor department that occupies 1,100 square feet, and Juan Chiro manages a second-floor department that occupies 1,700 square feet of floor space. In discussing the departmental reports, the second-floor manager questions whether using the same rate per square foot for all departments makes sense because the first-floor space is more valuable. This manager also references a recent real estate study of average local rental costs for similar space that shows first-floor space worth $40 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance).

Allocate the depreciation, interest, and taxes occupancy costs to the Linder and Chiro departments in proportion to the relative market values of the floor space. Allocate the heating, lighting, and maintenance costs to the Linder and Chiro departments in proportion to the square feet occupied (ignoring floor space market values). (Round cost answers to 2 decimal places. Round your intermediate calculations to 2 decimal places.)

Solutions

Expert Solution

We have market value ratios as 2:1 for first and second floor which means thst first floor is twice of second floor in value accordingly we will distribute depreciation and interest epxense in 2:1 as follows

Depriciarion for first floor = 31500x2/3 = 21000

Depriciation per square foot on first floor = 21000/7000 = $3

Interest for first floor = 47250x2/3 = 31500

Interest per square foot on first floor = 31500/7000 = $4.5

Taxes for first floor = 14000x2/3 = 9333

Taxes per square foot = 9333/7000 = 1.33

Depriciation, interest and taxes for for second floor = 92750/3 = 10500

Depriciation per square foot on second floor = 10500/7000 = $1.5

Interest for secondly floor = 47250/3 = 15750

Interest per square foot on second floor = 15750/7000 = $2.25

Taxes for second floor = 14000/3 = 4666.67

Taxes for second floor pee square foot = 4666.67/7000

= $0.67

Follwing are the cost distribution among linder and chiro department :-

Particulars Linder Chiro
Depriciation - building (3x1100) (1.5x1700)
Interest - building mortgage (4.5x1100) (2.25x1700)
Taxes 1463 (1.33x1100)

(.67x1700)
Gas (4375x1100/14000) 4375x1700/14000)
Lighting (5250x1100/14000) (5250x1700/14000)
Maintenance (9625x1100/14000) (9625x1700/14000)
Maintenance exp

ekkarill92 answered 1 year ago
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