Citizens Bank has several departments that occupy both floors of a two-story bui

Question

Citizens 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:


Depreciation—Building $31,500
Interest—Building mortgage 47,000
Taxes—Building and land 14,000
Gas (heating) expense 4,425
Lighting expense 5,250
Maintenance expense 9,625
Total occupancy cost

$111,800

The building has 5,000 square feet on each floor. In prior periods, the accounting manager merely divided the $111,800 occupancy cost by 10,000 square feet to find an average cost of $11.18 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.

Helen Lanya manages a first-floor department that occupies 1,000 square feet, and Jose Jimez manages a second-floor department that occupies 1,700 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 $40 per square foot and second-floor space worth $10 per square foot (excluding costs for heating, lighting, and maintenance).

Allocate the depreciation, interest, and taxes occupancy costs to the Lanya and Jimez departments in proportion to the relative market values of the floor space.

Floor Market Value % of Total Allocated Cost
First Floor $ % $
Second Floor % $

Allocate the heating, lighting, and maintenance costs to the Lanya and Jimez departments in proportion to the square feet occupied (ignoring floor space market values).

Explanation / Answer

Market value of 1st floor 5000*40 = 200,000 Market value of 2nd floor 5000*10 = 50,000 Total market value = 250,000 Percent of total allocated cost first - 200,000/250,000 = 0.8 80% second - 50,000/250,000 = 0.2 20% For depreciation of 31,500 first floor .8 *31,500 = 25,200 Lanya 25,200 * (1000/5000) = 5040 second floor .2 * 31500 = 6300 Jimez 6300 * (1700/5000) = 2142 for interest of 47000 first floor .8 * 47000 = 37600 Lanya 37600 * (1000/5000) = 7520 second floor .2 * 47000 = 9400 Jimez 9400 * 1700/5000 = 3196 for taxes of 14000 first floor 14000 * .8 = 11200 Lanya 11200 * 1000/5000 = 2240 seocnd floor 14000 * .2 = 2800 Jimez 2800 * 1700/5000 = 952 heating 4425/10,000 = .4425 per sq ft Lanya .4425 * 1000 = 442.50 Jimez .4425 * 1700 - 752.25 lighting 5250/10,000 = .525 per sq ft Lanya .525 * 1000 = 525 Jimez .525 * 1700 = 892.50 Maintenance 9625/10,000 = .9625 per sq ft lanya .9625 * 1000 = 962.50 Jimez .9625 * 1700 = 1636.25

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