Heart & Home Properties is developing a subdivision that includes 600 home lots.

Question

Heart & Home Properties is developing a subdivision that includes 600 home lots. The 450 lots in the Canyon section are below a ridge and do not have views of the neighboring canyons and hills; the 150 lots in the Hilltop section offer unobstructed views. The expected selling price for each Canyon lot is $55,000 and for each Hilltop lot is $110,000. The developer acquired the land for $4,000,000 and spent another $3,500,000 on street and utilities improvements. Assign the joint land and improvement costs to the lots using the value basis of allocation and determine the average cost per lot. Cost to Allocated Quantity Average Allocate Market Value Percent of Market Value Cost of Lots Lot Cost Numerator Denominator % of Mkt Value Canyon section Hilltop section Totals

Explanation / Answer

Market Value of Canyon Section = Quantity of Lots*Expected Selling Price

= 450 lots*$55,000 = $24,750,000

Market Value of Hilltop Section = Quantity of Lots*Expected Selling Price

= 150 lots*$110,000 = $16,500,000

Total Cost to Allocate = $4,000,000+$3,500,000 = $7,500,000

Allocation of cost (Amounts in $)

Market Value Percent of Market Value Cost to Allocate Allocated Cost Quantity of Lots Average Lot Cost (A) (B) (C = A*B) (D) (C/D) Canyon section 24,750,000 24,750,000 41,250,000 60% 7,500,000 4,500,000 450 10,000 Hilltop section 16,500,000 16,500,000 41,250,000 40% 7,500,000 3,000,000 150 20,000 Totals 41,250,000 100% 7,500,000

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