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Hello Chris,
This question is from Kaplan kit:
Hindberg is a car retailer. On 1 April 20X4, Hindberg sold a car to Latterly on the following
terms:The selling price of the car was $25,300. Latterly paid $12,650 (half of the cost) on 1 April
20X4 and will pay the remaining $12,650 on 31 March 20X6 (two years after the sale).
Latterly can obtain finance at 10% per annum.What is the total amount which Hindberg should credit to profit or loss in respect of this
transaction in the year ended 31 March 20X5?The answer is D
At 31 March 20X5, the deferred consideration of $12,650 would need to be discounted by
10% for one year to $11,500 (effectively deferring a finance cost of $1,150). The total
amount credited to profit or loss would be $24,150 (12,650 + 11,500).Might sound a bit silly to ask but why do we include 11500 amount in the current year’s P/L even though it is to be paid after 2 years of sale?
Thank a lot for all the help and patience! 🙂
Hi,
The car has been sold, and so we need to recognise the total revenue in relation to the car, so effectively calculating the transaction price. The date the payment is received will not change the fact that we need to recognise the revenue, but does change the price as the deferred payment will need to be at present value. So the $12,650 is discounted back to present value to give the $£11,500 and added to the $12,650.
Hope that clears it up and thanks for making it easier to answer your question by including everything from the materials, it helps massively.
Thanks
Chris
Thanks a lot for your clear explanation!
And will surely keep this thing in my mind for future queries 🙂Have a good day ahead! 🙂
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