Question

qs 22-21a (algo) joint cost allocation lo c2 a company purchases a 8,580-square-foot building for $340,000. the building has two separate rental units. unit a, which has the desirable location on the corner and contains 1,755 square feet, will be rented for $2.00 per square foot. unit b contains 6,825 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 allocation?

Answer 1

To allocate the joint cost of $340,000 between Unit A and Unit B, we calculate the proportion of potential rental income for each unit and allocate the costs accordingly, resulting in $101,709.40 for Unit A and $238,290.60 for Unit B.

Step-by-step explanation:

To allocate the joint cost to Unit A and Unit B using the value basis of allocation, we need to first calculate the potential rental income from each unit and then divide the joint cost proportionately.

The potential rental income for Unit A is 1,755 square feet at $2.00 per square foot, equaling $3,510. Similarly, Unit B's potential rental income is 6,825 square feet at $1.20 per square foot, which equals $8,190.

The total potential rental income is the sum of both units: $3,510 (Unit A) + $8,190 (Unit B) = $11,700.

The proportion of the total cost for Unit A is calculated as follows:
($3,510 / $11,700) x $340,000 = $101,709.40

For Unit B:
($8,190 / $11,700) x $340,000 = $238,290.60

So, Unit A would be allocated $101,709.40 and Unit B would be allocated $238,290.60 of the joint cost.