Exchange Corp. is a company that acts as a facilitator in tax-favored real estat

Question

Exchange Corp. is a company that acts as a facilitator in tax-favored real estate swaps. Such swaps, know as 1031 exchanges, permit participants to avoid some or all of the capital gains taxes that would otherwise be due. The bookkeeper for the company has been asked to prepare a report for the company to help its owner/manager analyze performance. The first such report appears below: Exchange Corp Analysis of Revenues and Costs For the Month Ended May 31 Actual Unit Revenues and Costs Planning Budget Unit Revenues and Costs Variances Exchanges completed 30 25 Revenue $ 570 $ 660 $ 90 U Expenses: Legal and search fees 227 210 17 U Office expenses 150 242 92 F Equipment depreciation 25 30 5 F Rent 75 90 15 F Insurance 15 18 3 F Total expense 492 590 98 F Net operating income $ 78 $ 70 $ 8 F Note that the revenues and costs in the above report are unit revenues and costs. For example, the average office expense is $242 per exchange completed on the planning budget; whereas, the average actual office expense is $150 per exchange completed. Legal and search fees is a variable cost; office expenses is a mixed cost; and equipment depreciation, rent, and insurance are fixed costs. In the planning budget, the fixed component of office expenses was $4,800. All of the company’s revenues come from fees collected when an exchange is completed. Required: 1. Is the report prepared by the bookkeeper useful as a performance report? Yes No 2. Complete a performance report that would help the owner/manager assess the performance of the company in May. (Indicate the effect of each variance by selecting "F" for favorable, "U" for unfavorable, and "None" for no effect (i.e., zero variance). Input all amounts as positive values.)

Explanation / Answer

Particulars Actual Revenue and spending variance Flexible budget Activity variance Static budget Units 25 25 30 Revenue 570 20 F 550 110 U 660 Expenses Legal and search fees 227 52 U 175 35 F 210 Office expense 150 52 F 202 40 F 242 Equipment depreciation 25 0 F 25 5 F 30 Rent 75 0 75 15 F 90 Insurance 15 0 15 3 F 18 Total expense 492 0 U 492 98 F 590 Net operating income 78 20 U 58 12 U 70

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