Demonstration Problem

Solution to demonstration problems

Solution to demonstration problem A

CLEVELAND COMPANY

Schedule of Cost of 1,200 Residential Lots

Costs incurred:

Cash paid

$486,000

Mortgage note assumed

240,000

Interest accrued on mortgage note assumed

6,000

Broker and legal services

55,200

Clearing and leveling costs incurred

21,600

Tearing down costs

9,600

$818,400

Less proceeds from sale of:

Crops

$ 14,400

House

5,040

Salvaged materials

10,080

29,520

Net cost of land to be subdivided into1,200 lots

$788,880

 

Solution to demonstration problem B

a. Straight-line method:
\mathrm{2010: }\dfrac{(\text { USD } 45,000-\text { USD } 5,000)}{10}=\text{USD 4,000}

\mathrm{2011:} \dfrac{(\text { USD } 45,000-\text { USD5 }, 000)}{10}=\text{USD 4,000}
b. Units-of-production method:

\text{2010: } \dfrac{(\text {USD 45,000 - USD 5,000)}}{1,000,000}\times 90,000=\text{USD 3,600}

\text{2011: } \dfrac{\text{(U SD 45,000 - USD 5,000)}}{1,000,000} \times 125,000=\text{USD 5,000}

c. Double-declining-balance method:
\text { 2010: USD } 45,000 \times 20 \text { per cent }=\text { USD } 9,000
\text { 2011: }(\text { USD } 45,000-\text { USD } 9,000) \times 20 \text { per cent }=U S D 7,200

d. Straight-line:   \dfrac{(\mathrm{USD} \, 45,000-\mathrm{USD} \, 5,000)}{10} \times \dfrac{1}{4}=\mathrm{USD} \, 1,000

Units-of-production: (\mathrm{USD}\, 45,000-\mathrm{USD} \, 9,000-\mathrm{USD} \, 7,000) \times 0.2 \times \dfrac{1}{4}=\mathrm{USD} \, 1,440

Double-declining-balance: (\mathrm{USD} \, 45,000-\mathrm{USD} \, 9,000-\mathrm{USD} \, 7,000) \times 0.2 \times \dfrac{1}{4}=\mathrm{USD} \, 1,440