Question

Assume a contract for the sale of goods specifies that payment is to be made 15 months after delivery of a product. The seller is likely to do which of the following with respect to the time value of money over the life of the contract?
A. Recognize interest expense.
B. Recognize interest revenue.
C. Recognize additional cost of goods sold.
D. Ignore the time value of money.

Answer 1

Answer:

The correct Answer is B.

The seller is likely to recognize interest revenue.

Explanation:

What is interest revenue?

Interest revenue is the earnings that an entity receives from any investments it makes, or on debt it owns.

The Logic here posits that for every money invested or loaned out, some interest should accrue. The goods which have been taken delivery of to the buyer becomes a debt which normally should be paid with no strings attached.

However, because of the term in the contract which stipulates, that the payment will be made after 15 months, the concept of the Time Value of Money which is the bedrock of the Principle of Interest Revenue engages.

The Time Value of Money is a basic financial concept that holds that money in the present is worth more than the same sum of money to be received in the future. This is true because money that you have right now can be invested and earn a return, thus creating a larger amount of money in the future.

It therefore follows that if a party in a business transaction is being asked to forfeit the time value of money then it ought to be compensated for such, hence Interest Revenue.

Cheers!