National Bank has several departments that occupy both floors of a two-story bui
ID: 2483694 • Letter: N
Question
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.
The building has 3,000 square feet on each floor. In prior periods, the accounting manager merely divided the $48,000 occupancy cost by 6,000 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 900 square feet, and Juan Chiro manages a second-floor department that occupies 1,900 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 $30 per square foot and second-floor space worth $20 per square foot (excluding costs for heating, lighting, and maintenance).
Required:
1.Allocate occupancy costs to the Linder and Chiro departments using the current allocation method. (Round cost answers to 2 decimal places.)
2.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 your intermediate calculations to 2 decimal places.)
Depreciation—Building $ 13,500 Interest—Building mortgage 20,250 Taxes—Building and land 6,000 Gas (heating) expense 1,875 Lighting expense 2,250 Maintenance expense 4,125 Total occupancy cost $ 48,000Explanation / Answer
1)
Using the current allocation method of allocating the occupancy cost at the rate of $8 per square feet,
the occupency cost allocated to Linder = 900 sq. ft x $8 /sq.ft = $ 7200
the occupancy cost allocated to Chiro = 1900 sq ft x $8 /sq ft = $ 15200
2)
Total market value of the space occupied by Linder in the first floor = 900 x $30 = $27000
Total market value of the space occupied by Chiro in the second floor = 1900 x $20 = $38000
Total of the depreciation, interest, and taxes occupancy costs = 13500 + 20250 + 6000 = $39750
Total market value of the first floor = $30 x 3000 = $90000
Total market value of the second floor = $20 x 3000 = $60000
Total market value of the two floors = $90000 + $60000 = $150000
portion of the Cost of $39750 to be allocated to the first flooe = 39750 x (90000 / 150000) = $ 23850
Portion of the cots of $39750 to be allocated to the second floor = 39750 x (60000 / 150000) = $15900
the rate to be used for the allocation of cost to the first floor = 23850 / 3000 = $7.95 per sq. ft
the rate to be used for the allocation of cost to the second floor = 15900 / 3000 = $5.30 per square ft.
the depreciation, inteerst and taxe costs to be allocated to :
Linder = 900 sq ft x $7.95 / sq. ft = $7155
Chiro = 1900 sq ft x $5.30 / sq ft = $10070
Part two
total of heating, lighting, and maintenance costs = 1875 + 2250 + 4125 = $8250
Total floor space of the two floor = 6000 sq ft
rate of allocation of these costs = $8250 / 6000 sq ft = $1.375 per sq ft
Total of heating, lighting, and maintenance costs allocated to:
Linder = 900 x 1.375 = $1237.50
Chiro = 1900 x 1.375 = $2612.50
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