Whether to consider land conveyed to government when allocating costs by sales

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  • #1496382
    startupcfo
    Participant

    On July 1, year 1, Link Development Company purchased a tract of land for $900,000. Additional costs of $150,000 were incurred in subdividing the land during July through December year 1. Of the tract acreage, 70% was subdivided into residential lots as shown below and 30% was conveyed to the city for roads and a park.

    Lot class Number of lots Sales price per lot
    A 100 $12,000
    B 100 8,000
    C 200 5,000

    Under the relative sales value method, the cost allocated to each Class A lot should be
    $2,625
    $2,940
    $3,600
    $4,200

    This answer is incorrect. Per ASC 970, real estate donated to municipalities or other governmental agencies for uses that will benefit the project shall be allocated as a common cost of the project. None of the cost should be allocated to land donated to the city, since that land will not directly generate revenue (and therefore has no sales value). Therefore, the total cost of acquiring the land ($900,000 + $150,000 = $1,050,000) should be allocated to the lots which will generate revenue. The $1,050,000 cost is allocated based on the relative sales value of the lots, as computed below.

    Lot class # of Sales price Total sales value
    A 100 Ă— $12,000 = $1,200,000
    B 100 Ă— 8,000 = 800,000
    C 200 Ă— 5,000 = 1,000,000
    $3,000,000

    Basically, we spent $1,050,000 to buy and subdivide land. 70% of that land has been chopped up and sold for cash. 30% was “conveyed” to the government.

    Am I to take it that the 30% of land was given to the government for free?

    AUD - 93
    BEC - 87
    FAR - 77
    REG - 77
    ------------
    Corporate finance leader

    BEC - 87 | 02/28
    REG - 70 | 06/10, REMATCH | 08/30
    AUD - XX | 09/10
    FAR - XX | 12/10

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