Question

4 of 2 Required Information Problem 22-2A Allocation of building occupancy costs to departments LO P2 The following information applies to the questions displayed below) National 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 Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense Total occupancy cost $ 18, 27. Be 8. 2. See 3. 70 $ 54.000 The building has 4,000 square feet on each floor. In prior periods, the accounting manager merely divided the $64.000 occupancy cost by 8,000 square feet to find an average cost of $8 per square foot and then charged each department a building occupancy cost equal to this rate times the number of square feet that it occupled. Diane Linder manages a first floor department that occuples 1,000 square feet, and Juan Chiro manages a second floor department that occuples 1,800 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 $30 per square foot and second floor space worth $10 per square foot (excluding costs for heating, lighting, and maintenance), Problem 22-2A Part 1 Required: 1. Allocate occupancy costs to the Linder and Chiro departments using the current allocation method (Round cost answers to 2 decimal places.) Department Square Footage Rate Total Linder's Dept Chiro's Dept

Answer 1

National Bank Depreciation-Building Interest-Building mortgage Taxes-Building and land Gas (heating) expense Lighting expense Maintenance expense Total Total Cost Value-Based Costs Usage-Based Costs 18000 18000 27000 27000 8000 8000 2500 2500 3000 3000 5500 5500 64000 53000 11000 Allocation of costs on based on market value: Market value of floor = Square Foot x Value per square feet Market value of first floor = 4,000 x $30 = $120,000 Market value of second floor = 4,000 x $10 = $40,000 Proportion of first floor in total value based cost = $120,000/ ($120,000+ $40,000) = 75% Proportion of Second floor in total value based cost = $40,000/ ($120,000+ $40,000) = 25% Allocation of value based cost to first floor = $53,000 x 75% = $39,750 Cost per square feet = $39,750 / 4,000 = $9.94 Allocation of value based cost to Second floor = $53,000 X25% = $13,250 Cost per square feet = $13,250 / 4,000 = $3.31 Usage-based costs allocation rate = $11,000 / 8,000 = $1.375 sq. ft. Total allocation rates for the floors: First Floor = $9.94 + $1.375 = $11.315 Second Floor = $3.31 + $1.375 = $4.685 Allocation of occupancy costs to departments: Linder's Department = 1,000 x $11.315 = $11,315 Chiro's Department = 1,800 x $4.685 = $8,433