Question 18Q

Question

Perlman Land Development, Inc. purchased land for \(70,000 and spent \)30,000 developing it. It then sold the land for \(160,000. Sheehan Manufacturing purchased land for a future plant site for \)100,000. Due to a change in plans, Sheehan later sold the land for \(160,000. Should these two companies report the land sales, both at gains of \)60,000, in a similar manner?

Step-by-Step Solution

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Answer

No, both the business concerns are required to treat gain on sale of land in a different manner.

1Meaning of Business Concern

The term business concern refers to an entity established to generate revenues. It is a must for a business concern to perform ethical commercial activities such as selling and purchasing products or services.

2Treatment of gain on sale of land

According to the given scenario, the gain will remain the same for Perlman Land Development and Sheehan Manufacturing, but recording such a gain would be different.

As purchase and sale of land are the operating activity for the Perlman Land Development, the gain will be considered operating profit.

On the other hand, gain on land sale is non-operating; hence, it should be considered an extraordinary gain.

Question 17Q

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