Question

Semester Case - Cowboy Ice Cream, Inc. Cowboy Ice Cream, Inc. (CIC) holds one piece of land which it had not intended to sell immediately. However, near the end of January 2018, the shareholders discussed selling the land to purchase customized equipment for the summer operating months. In the past, CIC has rented an ice cream truck for use during the summer, but renting prohibits full customization of the truck (including permanent signage) and W.1. feels the company is missing out on a prime opportunity to advertise. So, CIC has been exploring possible offers to sell the land and so far has two: 1. Offer #1 is for $25,000, with $15,000 cash payable now and the remaining $10,000 payable in one year. 2. Offer #2 is for $18,000, with the full $18,000 payable in cash now. Required (consult Class 13 Packet as needed): a. Will offer #1 result in a gain or loss of what amount b. Will offer #2 result in a gain or loss? Of what amount? c. CIC decides to accept offer #1. In its January income statement, how will the presentation of the gain or loss differ from the gross margin for the month? d. In its January statement of cash flows, how will the presentation of the gain or loss differ from the gross margin for the month

I need the explanation with the answers please. thank you and thumbs up!

Answer 1

a. Offer 1 will result in gain even if we calculate the NPV of remaining payable $10000.

if it is taken @10% discounting factor then gain will - $15000+9090 ($10000*.909) =24090 hence gain would be $24090-$18000 =$6090

b. Offer 2 will result in loss of $6090

c. Sale of Land will amount to Capital Gain which is non operating income will be differ from gross margin for the month

d. Cash flow will increase by $15000 in the month of January