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Hi Chris
I tried to solve the exam prep question at the end of chapter 16 and later looked at the answer. Whilst i get the 5% cost of capital, i have 2 questions as under.1. When the PV of $4m investment is 3,809,524 and the directors are recording $2m sale in X8 and the rest $2m in X9, why should we deduct $2m from 3,809,524 to consider only $1,809,524 as X8’s revenue and NOT split the 3,809,524 into 50% in both years like we’re doing for investment income of $190,476?
2. Please confirm if the discount factor of 0.9524 is given just to create confusion and is not used anywhere in the calculations.Thank you very much.
Hi,
1. We do not need to split anything in relation to the sale of the goods. What Alex has done is totally incorrect. They should record the revenue for the sale of goods at the present value of the amount to be received ($4m x 0.9524) as the transaction is taking place at a point in time. We then look at recording the interest income on the sale, which is over a period of time and hence why we are only looking at 6-months (half) of the full amount of annual interest.
2. The 0.9524 is the one year discount factor at 5% (1/1.05) and is used to calculate the present value of the $4m.
Hope that clears it up for you.
Thanks
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