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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 91and one year later when the cash is received:
Dr Cash 1000
Cr Trade receivables 1000Dr Deferred income 91
Cr PL 91or
Solution 2:
Dr Trade receivables 909
Cr Revenue 909and at the year end :
Dr Cash 1000
Cr Trade receivable 909
Cr PL 91Thank you very much
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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