Question

Bill Amends, owner of Bonita Estate Inc., buys and sells commercial properties. Recently, he sold land for $2,950,000 to the Blackhawk Group, a developer that plans to build a new shopping mall. In addition to the $2,950,000 sales price, Blackhawk Group agrees to pay Bonita Estate Inc. 1% of the retail sales of the mall for 10 years. Blackhawk estimates that retail sales in a typical mall project is $960,000 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 $3,180,000. However, Blackhawk would not agree to those terms.
Required:
1. What is the transaction price for the land and related royalty payment that Bonita Estate Inc. should record?

Answer 1

Answer:

The transaction price for the land and related royalty payment is $2,950,000

Explanation:

Transaction cost is a fixed and certain cost where an exchange is made. Here the specific cost is $2,950,000 only, since this is the undefined selling cost. 1% commission ought not be considered here, on the grounds that it depends on deals and the deal figure may change in future. In this manner, the measure of commission isn't sure.  Therefore, the transaction cost is $2,950,000

Answer 2

Answer: $3,046,000

Explanation: Selling price = $2,950,000

Annual sales in the mall = $960,000

Amount owed Bill in royalty = 1% of yearly sales in the next 10years

Amount proposed by bill instead of royalty based system = $3,180,000.

Royalty owed Bill yearly

= 1 × $960,000 / 100

= $9600

Royalty owed Bill in 10year

= Yearly royalty × 10years

= $9600 × 10

= $96,000

transaction price for the land and related royalty payment that Bonita Estate Inc. should record.

This would be selling price + royalty due for 10years

= $2,950,000 + $96,000

= $3,046,000