Question

One year ago your company purchased 10 parcels of land for 12.3 million each. A recent appraisal indicated that 5 are now worth 9.9 million and the other five are worth 17.9 million. What is economic and accounting earnings in the following cases:

a. The company sells all properties at appraised values
b. The company sells none of the properties
c. The company sells the properties that have fallen in value and keeps the others
d. The company sells the properties that have risen in value and keeps the others
(a) Economic: 35 million, Accounting: 61 million
(b) Economic: 0 million, Accounting: -23 million
(c) Economic: 14 million, Accounting: 9 million
(d) Economic: 23 million, Accounting: 8 million

Answer 1

In calculating economic and accounting earnings based on the given scenarios of property sales, we find differences in the outcomes depending on whether properties are sold or retained and their respective changes in value.

Step-by-step explanation:

The concept of economic and accounting earnings is central to business decision-making processes. Economic earnings consider both implicit and explicit costs, while accounting earnings are typically calculated by subtracting explicit costs from total revenues. Using the given appraisal values of the company properties, we can calculate the economic and accounting earnings under different scenarios:

1. Selling all properties at appraised values results in an economic earnings of 35 million, which is calculated by considering the total revenues from selling the properties minus the original cost. Accounting earnings would be 61 million, as it does not consider the implicit cost difference between purchase price and current market value.
2. If the company sells none of the properties, the economic earnings are 0 million, as there is no exchange transaction. However, the accounting earnings would reflect an unrealized loss of -23 million due to the decline in property values.
3. Selling the properties that have fallen in value and keeping the others would result in economic earnings of 14 million and accounting earnings of 9 million.
4. If the company sells the properties that have risen in value and keeps the others, the economic earnings would be 23 million and the accounting earnings would be 8 million.

Therefore, it's crucial to understand the difference between economic and accounting earnings when assessing the financial health and performance of a company under various scenarios.