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Cod Co sold goods to Eel Co on 1 January 20X2 for $200,000, payable on 31 December 20X3. Eel Co cannot return the goods. The relevant discount rate is 6%.
What amount of revenue and finance income should be recognised in Cod Co’s statement of profit or loss for the year ended 31 December 20X2?For this question, I’m already comfortable with the revenue which is 200000 x 0.890 = 178000.
But for finance income which is “the difference between the revenue recognised and the consideration received” as written in the BPP Workbook. Therefore, it is 200000 – 178000 = 22000.
However, the solution calculates it as 178000 x 6% = 10680.
This has caused me some confusion. So can you please explain what is finance income and how to calculate it?Hi,
You need to be watchful of the dates given in the question as here the sale is made on 1 January 20X2 and the cash received on 31 December 20X3, which is two years in total. The figure you have of 22,000 is the total finance income over the two years and the question is only asking for the finance income for the first year of the contract.
To work out the finance income we will apply the discount rate to the outstanding receivable figure of 178000 to get the 10680. We then record the income and increase the balance on the receivable.
For the second year (if asked) then you apply the same 6% to the new balance on the outstanding receivable.
Hope that helps clear it all up.
Thanks
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