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Chapter 18: Question E18-6 (page 1035)

(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?

Short Answer

Expert verified

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

The royalty payment is $0

Step by step solution

01

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.

02

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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Most popular questions from this chapter

On June 1, 2017, Mills Company sells \(200,000 of shelving units to a local retailer, ShopBarb, which is planning to expand its stores in the area. Under the agreement, ShopBarb asks Mills to retain the shelving units at its factory until the new stores are ready for installation. Title passes to ShopBarb at the time the agreement is signed. The shelving units are delivered to the stores on September 1, 2017, and ShopBarb pays in full. Prepare the journal entries for this bill-and-hold arrangement (assuming that conditions for recognizing the sale as a bill-and-hold sale have been met) for Mills on June 1 and September 1, 2017. The cost of the shelving units to Mills is \)110,000.

E18-34 (LO5) (Analysis of Percentage-of-Completion Financial Statements) In 2017, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was \(1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2017, are shown below.

Balance Sheet

Accounts receivables

\)18,000

Construction in process

$65,000

Less: billings

(61,500)

Costs and recognized profit in excess of billings

3,500

Income Statement

Income(before tax) on the contract recognized in 2017

19,500

Instructions

(b) What was the initial estimated total income before tax on this contract?

Tyler Financial Services performs bookkeeping and tax-reporting services to startup companies in the Oconomowoc area. On January 1, 2017, Tyler entered into a 3-year service contract with Walleye Tech. Walleye promises to pay \(10,000 at the beginning of each year, which at contract inception is the standalone selling price for these services. At the end of the second year, the contract is modified and the fee for the third year of services is reduced to \)8,000. In addition, Walleye agrees to pay an additional $20,000 at the beginning of the third year to cover the contract for 3 additional years (i.e., 4 years remain after the modification). The extended contract services are similar to those provided in the first 2 years of the contract.

Instructions

(a) Prepare the journal entries for Tyler in 2017 and 2018 related to this service contract.

(b) Prepare the journal entries for Tyler in 2019 related to the modified service contract, assuming a prospective approach.

(c) Repeat the requirements for part (b), assuming Tyler and Walleye agree on a revised set of services (fewer bookkeeping services but more tax services) in the extended contract period and the modification results in a separate performance obligation.

Question: P18-12 (LO8) (Franchise Revenue) Amigos Burrito Inc. sells franchises to independent operators throughout the northwestern part of the United States. The contract with the franchisee includes the following provisions.

1. The franchisee is charged an initial fee of \(120,000. Of this amount, \)20,000 is payable when the agreement is signed, and a \(100,000 zero-interest-bearing note is payable with a \)20,000 payment at the end of each of the 5 subsequent years. The present value of an ordinary annuity of five annual receipts of \(20,000, each discounted at 10%, is \)75,816.

2. All of the initial franchise fee collected by Amigos is to be refunded and the remaining obligation cancelled if, for any reason, the franchisee fails to open his or her franchise.

3. In return for the initial franchise fee, Amigos agrees to (a) assist the franchisee in selecting the location for the business, (b) negotiate the lease for the land, (c) obtain financing and assist with building design, (d) supervise construction, (e) establish accounting and tax records, and (f) provide expert advice over a 5-year period relating to such matters as employee and management training, quality control, and promotion. This continuing involvement by Amigos helps maintain the brand value of the franchise.

4. In addition to the initial franchise fee, the franchisee is required to pay to Amigos a monthly fee of 2% of sales for menu planning, recipe innovations, and the privilege of purchasing ingredients from Amigos at or below prevailing market prices. Management of Amigos Burrito estimates that the value of the services rendered to the franchisee at the time the contract is signed amounts to at least \(20,000. All franchisees to date have opened their locations at the scheduled time, and none have defaulted on any of the notes receivable. The credit ratings of all franchisees would entitle them to borrow at the current interest rate of 10%.

Instructions

(b) Prepare the journal entries for the initial and continuing franchise fees, assuming:

(1) Franchise agreement is signed on January 5, 2017.

(2) Amigos completes franchise startup tasks and the franchise opens on July 1, 2017.

(3) The franchisee records \)260,000 in sales in the first 6 months of operations and remits the monthly franchise fee on December 31, 2017.

Question: P18-8 (LO2,3) (Time Value, Gift Cards, Discounts) Presented below are two independent revenue arrangements for Colbert Company.

Instructions

Respond to the requirements related to each revenue arrangement.

(a) Colbert sells 3D printer systems. Recently, Colbert provided a special promotion of zero-interest financing for 2 years on any new 3D printer system. Assume that Colbert sells Lyle Cartright a 3D system, receiving a \(5,000 zero-interest bearing note on January 1, 2017. The cost of the 3D printer system is \)4,000. Colbert imputes a 6% interest rate on this zero-interest note transaction. Prepare the journal entry to record the sale on January 1, 2017, and compute the total amount of revenue to be recognized in 2017.

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