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“Tang enters into a contract with a customer to sell an existing printing machine such that control of the printing machine vests with the customer in two years’ time. The contract has two payment options. The customer can pay $240,000 when the contract is signed or $300,000 in two years’ time when the customer gains control of the printing machine. The interest rate implicit in the contract is 11·8% in order to adjust for the risk involved in the delay in payment. However, Tang’s incremental borrowing rate is 5%. The customer paid $240,000 on 1 December 2014 when the contract was signed.”
Answer given (not full answer),
“Recognition of contract revenue on transfer of printing machine at 30 November 2016 of $264,600 by debiting contract liability and crediting revenue with this amount.”I don’t understand why did they credit revenue $264,600, instead of crediting revenue $240,000 and crediting finance income of $24,600?
So you agree on the total P&L income of 264,600 which is a quantum leap in itself.
I would probably have done what you did and credited the 24,600 to finance income.
A very weird question.
As always to get through…………explain the relevant stages in the revenue recognition model and show some attempt at the numbers.
Best I can do.
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