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On 1 April 2014, Glaze made a large sale of goods to a new customer on extended credit terms. Control over the good passed on this date. The customer agreed to pay $3 million on 31 March 2016. Market rates of interest are 10%.
In March 2015 there were unexpected movements in currency markets which placed a large strain on the customer’s cash balance. As at 31 March 2015, the customer agreed with Glaze that they will now pay $1 million on the original due date and a further $1.8 million on 31 March 2017.I have to recognise revenue and receivable at date of transaction
$3m x 1/1.10^2 = $2.48mThis is a financial asset receivable
When customer pay $1m
Dr bank $1m
Car receivable $1mAm I right?
Do I need to do something for the $1.8m?
Thanks Mike
How did we arrive at the figure $2.48? By discounting
So at the end of the first year we need to unroll the discount by $248,000 giving a carrying value of $2,728,000
Then we receive $1m reducing carrying value to $1,728,000But when it comes time to pay next year, that $1,728,000 needs to be unrolled again by 10% ($172,800) and we arrive at $1,900,800 whereas it should be $2m
Overall there’s an expected loss of $100,800 (It’s exactly $100,000 if you use full discount factors without the roundings)
The treatment of expected losses is covered in the course notes!
Where’s the question from?
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