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Q: on 1/4/X4 the company sold car to Latterly. Selling price was $25300 and Latterly paid $12650 (half of the cost) on 1/4/x4 and would pay remaining 12650 on 31/3/x6 (2 yrs after the sale) COC is 10% Find the total amount that company should credit to P/L in respect of this transaction in y/e 31/3/20×5.
I want to know what amount are we looking for here in respect for items to be included to P/L. I thought it was finance cost – interest.
obligation start + interest (10%) – payment = obligation end
[Yr X4] 25300 + 2530 – 12650 = 15180
[Yr X5] 15180 + 1518 -0 = 16698
[Yr X6] 16698 + 1670 – 12650 = 5718Since they want X5 so finance cost for X5 is 1518
But the answer given is deferred consideration 12650 should be discounted to 10% giving finance cost 1150 and total cost credit is 24150.
I want to know to reason for this and what the question is looking for actually. Because i regard payment being an NCL/CL item and not SOPL item
Hi,
To work out the initial amount credited on entering into the transaction then we need to discount the cash flows to present value using the 10% discount rate. One cash flow is received immediately and the other in two years’ time. The initial journal would then be:
DR Bank (amount received immediately)
DR Receivable (PV of amount received in two years’ time)
CR RevenueI’ll allow you to try and calculate the numbers.
Once you’ve done that then the interest income I see calculated for the year on the receivable and if you add the interest receivable and the initial entry to revenue then you have the total amount credited to profit or loss in the year.
See how you get on.
Thanks
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