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Hi, would like to ask on Sep/Dec 2020 Question 2.
Here’s the question:
Calibra Co builds apartment blocks which normally take two years to complete from the date of signing the contract.
The title and possession, and therefore control, of the apartment blocks pass to the customer upon completion of construction. The price which is payable on completion of each apartment block is $9·55 million. Alternatively, customers can pay $8·5 million cash on the day that the contract is signed. The chief accountant has calculated that this represents an appropriate borrowing rate of 6% for Calibra Co. Calibra Co immediately recognises $8·5 million as
revenue if customers pay when they sign the contract.My question:
“The chief accountant has calculated that this represents an appropriate borrowing rate of 6% for Calibra Co.”
What does this mean? Isnt means that customer only pay $8.5mil only? This interest rate 6% will be borne by Calibra Co.?
i thought it was just to calculate the interest cost for year 1 and year 2 but why relate to the borrowing cost?
Kindly assists on this. Thanks.Also, also for part b, question require for the double entry for sale of an apartment block. May i know the $8.5mil will be record in 1/1/x8
DR Inventory
CR Closing stockAnd then received the money when contract signed,
DR Cash
CR Liability?I’m guessing that you’ve already watched my debrief of this question.
If you pay before control passes, you are arguably ‘lending money’ to the other person, because, in a dream world, you should pay on the day that control passes.
All they are looking for is an appreciation of the issue – you certainly don’t have to agree with the suggested answer at this level. If you have put down some knowledge that is relevant you will pass.
8.5 – Dr Inventory Cr Liability. You may need to revise double entry for stock (in our FA notes)
(IN FUTURE PLEASE SHOW THEME OF YOUR QUESTION IN THREAD HEADER – EG REVENUE)
Ok understand on the lending money part.
But the double entry you shows is 8.5 – Dr Inventory Cr Liability. How about the cash received?
Could you show the full double entry for this 2 years? Thanks.
Sorry Soo – typo in last reply.
Receipt of cash: Dr Cash Cr Liability 8500
Over first year: Dr WIP Cr Liability 510 (interest capitalised)
Over second year Dr WIP CR Liability 540 (compounded interest capitalised)
Completion Dr Liability Cr Revenue 9550(Revenue then matched against total costs of WIP including the capitalised finance costs in Cost of Sales)
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