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A company purchases a 8,970-square-foot building for $415,000. The building has two separate rental units. Unit A, which has the desirable location on the corner and contains 1,170 square feet, will be rented for $2.00 per square foot. Unit B contains 7,800 square feet and will be rented for $1.20 per square foot.How much of the joint cost should be allocated to Unit A and to Unit B using the value basis of allocatio

Question

A company purchases a 8,970-square-foot building for 415,000.Thebuildinghastwoseparaterentalunits.UnitA,whichhasthedesirablelocationonthecornerandcontains1,170squarefeet,willberentedfor415,000. The building has two separate rental units. Unit A, which has the desirable location on the corner and contains 1,170 square feet, will be rented for 2.00 per square foot. Unit B contains 7,800 square feet and will be rented for $1.20 per square foot.How much of the joint cost should be allocated to Unit A and to Unit B using the value basis of allocatio

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Solution

To allocate the joint cost based on the value basis of allocation, we first need to determine the total value of each unit.

  1. Calculate the total value of each unit by multiplying the square footage by the rental rate:

    • Unit A: 1,170 square feet * 2.00/squarefoot=2.00/square foot = 2,340
    • Unit B: 7,800 square feet * 1.20/squarefoot=1.20/square foot = 9,360
  2. Calculate the total value of both units combined:

    • Total value = Value of Unit A + Value of Unit B = 2,340+2,340 + 9,360 = $11,700
  3. Calculate the proportion of the total value that each unit represents:

    • Unit A: 2,340/2,340 / 11,700 = 0.2 or 20%
    • Unit B: 9,360/9,360 / 11,700 = 0.8 or 80%
  4. Allocate the purchase cost of the building to each unit based on these proportions:

    • Unit A: 20% * 415,000=415,000 = 83,000
    • Unit B: 80% * 415,000=415,000 = 332,000

So, 83,000ofthejointcostshouldbeallocatedtoUnitAand83,000 of the joint cost should be allocated to Unit A and 332,000 should be allocated to Unit B.

This problem has been solved

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