Question

Slgnlficant Flnanclng Component, Dellvery before Payment. Shifty Beaver Transmission Company enters into a contractwith a major US. auto manufacturer to design and produce four-speed transmissions for small SUVs- Under the terms ofthe contract, Shifty Beaver will deliver the transmission immediately but the auto manufacturers will defer payment for fouryears, the end of the life of the base warranty. The contract price is $3,500,000 and the interest rate incurred on similarfinancing agreements in the industry is 5%.Requlreda. Is there a significant financing component in this contract?b- If there is a significant financing component, determine the amount of sales revenue and interest revenue to berecognized by Shifty Beaver.

Answer 1

Answer:

sales revenue: 2,879,458.66

interest revenue over the period:  620,541.34 (this will be accrued by a portion each year)

Explanation:

As the goods are delivered immediately but the payment delayed for years, there is a significant financing component

To know the sales revenue and interest reveneu we should discount the 3,500,000 at 5% discount rate to know the present value of the goods sold:

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity  3,500,000.00

time  4.00

rate  0.05000

$\frac{3500000}{(1 + 0.05)^{4} } = PV$  

PV   2,879,458.66