Practice Activity 13.24 The inclusion or exclusion of a significant financing component in a contract
A reporting entity sells a construction machine on 1 May 2017. Based on the sales agreement, the entity will receive ₦10,240 on 30 April 2020 (three years later).
The discount rate is 7%.
Required:
i. Explain with calculations how the consideration be measured and recognised at contract inception.
ii. Explain with calculations how the interest revenue be measured and recognised by 30 April 2018, 30 April 2019 and 30 April 2020 respectively.
See the suggested answers to practice activity 13.24 here.
Suggested answers to practice activity 13.24
i. Measurement and recognition of the consideration at contract inception.
Contract commenced on 1 May 2017.
Initial measurement of the consideration:
= ₦10,240 ( 1/(1+0.07)3)
= ₦10,240 ( 1/1.225043 )
= ₦8,358.89
Initial recognition of the consideration:
Debit Receivables with ₦8,358.89
Credit Revenue with ₦8,358.89
Measurement of interest revenue by 30 April 2018:
₦8,358.89 * 7% = ₦585.12
Recognition of interest revenue of ₦585.12:
Debit Receivables with ₦585.12
Credit Revenue – interest with ₦585.12
Receivable balance brought forward from 1 May 2017 ₦8,358.89
Plus
Revenue – interest recognised in the period ₦585.12
Equals
Receivable balance carried forward to 1 May 2018 ₦ 8,944.01
ii. Measurement of interest revenue by 30 April 2019:
₦8,944.01 * 7% = ₦626.08
Recognition of interest revenue of ₦626.08:
Debit Receivables with ₦626.08
Credit Revenue – interest with ₦626.08
Receivable balance brought forward from 1 May 2018 ₦8,944.01
Plus
Revenue – interest recognised in the period ₦626.08
=
Receivable balance carried forward to 1 May 2019 ₦9,570.09
Measurement of interest revenue by 30 April 2020:
₦9,570.09 * 7% = ₦669.91
Recognition of interest revenue of ₦669.91:
Debit Receivables with ₦669.91
Credit Revenue – interest with ₦669.91
Receivable balance brought forward from 1 May 2019 ₦9,570.09
Plus
Revenue – interest recognised in the period ₦669.91
₦10,240.00
Less
Consideration received (₦10,240.00)
Receivable balance carried forward to 1 May 2020 0
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