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Revenue recognition (including financing component)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Revenue recognition (including financing component)

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by P2-D2.
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  • Author
    Posts
  • December 30, 2020 at 11:36 am #601177
    trainee1
    Participant
    • Topics: 57
    • Replies: 30
    • ☆☆

    Dear tutor,
    Hope you are fine and thank you for your lectures. Could you please help me on the double entries for revenue recognition when there is a financing component. Should we recognise the net amount or gross amount ?
    I mean suppose, a company will receive 1000 as revenue in 1 year time and interest rate is 10%. So the NPV of the amount is 1000/1.1 = 909. Now which of the following entries are correct:

    Solution 1:

    Dr Trade receivables 1000
    Cr Revenue 909
    Cr deferred income 91

    and one year later when the cash is received:

    Dr Cash 1000
    Cr Trade receivables 1000

    Dr Deferred income 91
    Cr PL 91

    or

    Solution 2:
    Dr Trade receivables 909
    Cr Revenue 909

    and at the year end :

    Dr Cash 1000
    Cr Trade receivable 909
    Cr PL 91

    Thank you very much

    January 2, 2021 at 10:25 am #601298
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    You should record the revenue at the present value and an equivalent receivable for the same amount (DR Receivable CR Revenue)

    You then record an interest receivable for the interest income on unwinding the discount (DR Interest receivable CR Interest income).

    On receipt of the cash you then allocate it across the two receivable components (DR Bank CR Receivable CR Interest receivable)

    Thanks

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    Posts
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