Question

In: Accounting

You manage a real estate investment company. One year ago, the company purchased 10 parcels of...

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:

  1. The company sells all of the properties at their appraised values today.
  2. The company sells none of the properties.
  3. The company sells the properties that have fallen in value and keeps the others.
  4. The company sells the properties that have risen in value and keeps the others.

(Negative amounts should be indicated by a minus sign. Enter your answers in millions.)

Accounting Income (million) Economic Income (million)
a.
b.
c.
d.

Solutions

Expert Solution

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

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