Page 156 - FR Integrated Workbook 2018-19

Chapter 12

Example 1

Financing element

Rudd Co enters into a contract with a customer to sell equipment on
31 December 20X1. Control of the equipment transfers to the customer on
that date. The price stated in the contract is $1m and is due on 31 December
20X3.

Market rates of interest available to this particular customer are 10%.

Required:

Explain how this transaction should be accounted for in the financial
statements of Rudd Co for the year ended 31 December 20X1.

Solution

Due to the length of time between the transfer of control of the asset and the
payment date, this contract includes a significant financing component.

The consideration must be adjusted for the impact of the financing
transaction. A discount rate should be used that reflects the rate available to
the customer i.e. 10%.

Revenue should be recognised when the performance obligation is satisfied.

As such revenue, and a corresponding receivable, should be recognised at
2
$826,446 ($1 m × 1/1.1 ) on 31 December 20X1.
Tutorial note:

Each year, the discount on the receivable will be unwound by 10%,
recognising the increase as finance income, and increasing the value of the
receivable (debit receivable, credit finance income).

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