How will Stack Investors use the relative sales value method to allocate the purchase price of a rental property it purchased?

Photo of the exterior of a house at 121 Crain Ave in Kent Ohio
121 Crain Avenue, Kent, Ohio, USA

How will Stack Investors use the relative sales value method to allocate the purchase price of a rental property it purchased?

Stack Investors is a real estate company, specializing in student housing rentals. Black Squirrel Rentals recently purchased a house at 121 Crain Avenue in Kent for $55,000. Rooms in the house will be rented to students. The real estate purchase included the house and the land (.0611 acres) upon which it is located.

Assume that the house has an appraised value of $77,350, while the land has an appraised value of $13,650.

View a quick tutorial video about the relative-sales-value method for asset group purchases at this link and then answer the following questions.

Note to instructors: This post is assignable in Pearson’s MyLab and has questions that are auto-graded. All blog questions are found in Instructor Tools > Assignment Manager > Create Assignment > Create homework > And then change the chapter to “News. Accounting in the Headlines.” The “News. Accounting in the Headlines” chapter will be near the bottom of the list of chapters.

Questions

  1. What is the total appraised value of the house plus the land?
  2. Why is there a difference between the purchase price and the total appraised value?
  3. What is the relative sales method? Why is it important to allocate the purchase price to the house and to the land individually?
  4. Of the total appraised value, what percentage is the house? What percentage is the land?

Copyright 2022 Wendy M. Tietz, LLC


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About Dr. Wendy Tietz, CPA, CMA, CSCA, CGMA

Dr. Wendy Tietz is a professor of accounting at Kent State University in Kent, Ohio, USA. She is also a textbook author with Pearson Education.

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