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Question E18-6

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Intermediate Accounting (Kieso)
Found in: Page 1035

Short Answer

(Determine Transaction Price) Bill Amends, owner of Real Estate Inc., buys and sells commercial properties. Recently, he sold land for $3,000,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the $3,000,000 sales price, Blackhawk Group agrees to pay Real Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is $1,000,000 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 $3,250,000. However, Blackhawk would not agree to those terms.

Instructions

What is the transaction price for the land and related royalty payment that Real Estate Inc. should record?

The transaction price Real Estate should record is $3,000,000.

The royalty payment is $0

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Step by Step Solution

Meaning of Royalty

Royalty is a fee paid by the franchisor to the franchisor for the use of its assets such as patents, copyrights, and resources. It helps a franchisee to get the right to use the assets without actually buying them.

Transaction price and royalty payment that Real Estate record

A transaction price is a predetermined and established price at which a transaction is completed. Because this is the set selling price, the only assured price is $300,000. It is not necessary to record a 1% royalty every year for ten years because the money will not be guaranteed.

Transaction price is $3,000,000.

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