In: Accounting
You manage a real estate investment company. One year ago, the company purchased 10 parcels of land distributed throughout the community for $ 11.2 million each. A recent appraisal of the properties indicates that five of the parcels are now worth $9.0 million each, while the other five are worth $17.0 million each. Ignoring any income received from the properties and any taxes paid over the year, calculate the investment company’s accounting earnings and its economic earnings in each of the following cases:
(Negative amounts should be indicated by a minus sign. Enter your answers in millions.)
|
Accounting Income (million) | Economic Income (million) | |||||
a. | $ 18 | $ 18 | ||||
b. | $ 0 | $ 18 | ||||
c. | $ -11 | $ 18 | ||||
d. | $ 29 | $ 18 | ||||
Workings: | ||||||
Appraised (Fair) Value of Parcels |
5 parcels X 9.0 million each |
$ 45.00 | million | |||
5 parcels X 17.0 million each |
$ 85 | million | ||||
Total Appraised Value | $ 130 | million | ||||
Purchase price of the parcels |
10 parcels X 11.2 million each |
$ 112 | million | |||
a. | Net Income / (loss) on sale |
($130 million - $112 million) |
$ 18 | million | ||
Accounting Income (million) | $ 18 | million | ||||
Economic Income (million) | $ 18 | million | ||||
b. | Net Income / (loss) on sale |
($130 million - $112 million) |
$ 18 | million | ||
Accounting Income (million) |
(None of the parcels sold) |
$ 0 | million | |||
Economic Income (million) | $ 18 | million | ||||
c. | Net Income / (loss) on sale |
[$45 million - (5 parcels X $11.2 million)] |
$ -11 | million | ||
Accounting Income (million) | $ -11 | million | ||||
Economic Income (million) | $ 18 | million | ||||
d. | Net Income / (loss) on sale |
[$85 million - (5 parcels X $11.2 million)] |
$ 29 | million | ||
Accounting Income (million) | $ 29 | million | ||||
Economic Income (million) | $ 18 | million | ||||