Answer:
The correct answer is letter "B": The contract has a financing component that is significant to the contract.
Explanation:
Time value of money is a principle that states that today's dollar is worth more than tomorrow's dollar. This is because the money that could be received today may be deposited in a savings bank account or invested which implies that the initial sum has the potential to grow. If the same amount is received in later dates, the sum it could grow is likely to be lower.
Therefore,<em> if in a contract there is a financing component which implies considering an interest rate, the time value of money is to be included.</em>
Answer:
b) $500 is recognized in year 1 and $8,500 in year 2.
Explanation:
Calculation to determine When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?
Calculation for amount recognized in year 1
Payment in year 1= $9,000 ÷ 18 months
Payment in year 1= $500
Therefore Based on the above calculation the amount recognized in year 1 will be $500
Calculation for the amount recognized in year 2
Payment in year 2 = $9,000 - $500
Payment in year 2= $8,500
Therefore The amount recognized in year 2 will be $8,500
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