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Hi,
First off, love the website- it’s gotten me through a lot of exams before, and the videos really help with getting into detail about specific examples.
Just trying to wrap my head around the revenue from sale of goods example 1 in the notes- Chris mentioned that we should recognise $4,762 as revenue at year end. My thinking was that since the FV of consideration receivable is $5,000, and that’s what the customer is going to pay us, surely the $5,000 should be the part that’s recognised? Is the fair value at ‘today’s prices’ mean the 1st October or year end?
For example, say a company sells a car for $10,000 with 1 year interest free. A new model comes out before year end so this car could be bought today at $5,000. Would the revenue from the sale of the car really only be $5,000, even though the customer is still obligated to pay us $10,000?
I understand Chris mentioned something about interest consideration and not being too worried about it here, but it would help a lot with my understanding of the issue.
Thanks again!
Steven
Hi,
These type of deals are clever in how they are set up as although they say it is interest free it isn’t really, especially when you consider the substance of the transaction.
The $4,762 recognised is the value of the goods today and is also the present value of the $5,000 to be received in one year’s time, based upon the market rates of interest (5%)
On the initial sale, revenue of $4,762 would be recognised and a corresponding receivable recognised too. The receiveable is then increased by 5% over the year to take it to the $5,000 expected ($4,762 x 1.05) and a corresponding entry for interest receivable of $238 (5% x $4,762) recognised through profit or loss.
I don’t think that if a car was worth $5,000 that you would pay $10,000 for it in a year’s time, as that would equate to market rates of interest at 100%.
Hope that helps you understand it a bit more.
Thanks
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