This group of accounts represents a subdivision which was acquired in a manner different from any of those heretofore discussed. The Malvern Hill Land Company bought a considerable tract which was platted into town lots and placed on sale. A number of lots were sold and contracts given, some of which were paid up and deeds given to the purchasers. As some members of the Malvern Hill Company wished to retire, that company offered its entire holdings, consisting of unsold lots and open contracts, to the concern whose trial balance is under discussion, which bought them for a lump sum. When analyzed, it is found that the purchase price consisted of two items, one of which was the aggregate balances of the open contracts bought, and the other the cost of the unsold lots. As time went on, a number of the original contracts were cancelled, and the question arose as to whether the property thus acquired should be taken back on the books at the balance of the contract (which was really the cost price to the concern), or whether they should be taken in at the average cost per lot, the market value of one of these lots being the same as that of an adjacent lot which had not been sold.

It was decided that, in the case of a cancelled contract, the land should be taken in at the balance remaining unpaid on the contract, and this practice was continued for a year or more. The auditors then pointed out the confusion which was arising from having adjacent lots with widely divergent cost prices, and, when the balance was prepared, a list of all unsold lots was made. This showed that there were 1,392 of these lots and that they had cost $34,057.72, an average of about $25 a lot. Instructions were accordingly given that, in the event of any contract being cancelled, whether made originally by the Malvern Hill Company or by the concern, the entry therefor should be the following:

Malvern Hill Lots (cost price of a lot, $25)....

$ • • • •

Malvern Hill Gain...........................


To Malvern Hill Contracts .........................................


It will probably be admitted that in a contract of this description where the number of lots is large, this is a safe and conservative plan to follow, although objection may be raised as to its technical accuracy. In this particular case it was found that the amount of the contracts assumed by the concern, of which the balances were $37,467, had originally been $88,090; that they comprised 500 lots, which, taken on at a cost of $25 each, would then show an average profit of $150 per lot. These figures show that there are unearned profits amounting to $32,218, which is more than the total amount left in the Gain on Sales account, the discrepancy having been caused by the fact that many of the lots were originally bought at the face value of the contract.