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Hi I have a work book which is excellent, but I’m looking at something which is confusing me and it has done so previously.
We got a company A sold goods to company B on 1 Jan 2×2 for £200,000 payable on 31 Dec 2×3 with no refunds allowed.
relevant discount rate is 6%what amount of revenue and finance income should be recognised in company A’s statement of profit and loss for the year ended 31 Dec 2×2?
apparently, revenue = £200,000 x 0.89 (2 year 6% discount rate) = £178,000
Finance income in 2×2 + 178,000 x 6% = £10, 680
I just dont get how this actually works?
where is the 0.89 from? and what is the finance income ?
Hi,
The revenue recognised initially is the present value of the 200,000 discounted by two years at 6%. The 0.89 is the discount factor from using 6% (=1/1.06/1.06), which when applied to the 200,000 gives the revenue of 178,000.
Following the initial sale we then recognise finance income on the 178,000 at 6% each year. So 6% of 178,000, being the 10,680 is the finance income this year. This is recorded in profit or loss and the other side goes to the outstanding receivable.
Thanks
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