Exercise 18-6 Bill Amends, owner of Swifty Estate Inc., buys and sells commercia
ID: 2537860 • Letter: E
Question
Exercise 18-6
Bill Amends, owner of Swifty Estate Inc., buys and sells commercial properties. Recently, he sold land for $2,770,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the $2,770,000 sales price, Blackhawk Group agrees to pay Swifty Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is $990,000 a year. Given the substantial increase in online sales that are occurring in the retail market, Bill had originally indicated that he would prefer a higher price for the land instead of the 1% royalty arrangement and suggested a price of $3,029,000. However, Blackhawk would not agree to those terms.
What is the transaction price for the land and related royalty payment that Swifty Estate Inc. should record?
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Transaction price $Explanation / Answer
Transaction price is the price at which transaction will take place and transaction price has to be fixed and certain, as per the above explanation, certain price is 2,770,000, as the selling price is currently 2,770,000, hence it is the transaction and commission need to be omitted, since it changes in the future and not certain and changes with the selling price in the future, so not included in the transaction price.
Therefore the transaction price is $2,770,000
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