Question

A car leadership just sold a luxury car to a customer. The purchase contract establishes a base price of $60,000 plus a contractual interest rate of 4% payable in 60-monthly installments of $1,105. Control of the car was transferred when the client signed the contract drove off the lot . If the client had obtained separate financing (say a bank loan) for th e purchase of the car. his interest rate would have been 6%.

What amount of revenue should the car dealership record at the date of the sale?

What guidance should the dealership apply to subsequent measurement of its receivables?

Next, reflect upon what measurement attribute is being used to record the dealership revenue. How does this approach achieve the objective of this measurement attribute?

Hint: Use Excel to calculate PMT and PV.

Authoritative Guidance

Answer 1

1) Revenue would always be the Principal or the base price= $60000

2)The receivable could be discounted to the present value at 6% interest rate, as this is kind of the market rate.as this would be lower than the 4% discounted value, DEBIT the loss and write it off and CREDIT the Accounts Receivable every year

From the Financial calculator,

PV=60000, I=6%, FV=0, N=60

PMT= -3712 (From Financial Calculator)

So there is a loss of 3712-1105=2607 for Big Joe's every month.

so accounting entry will be:

Expense Debit 2607

Revenue Credit contra 2607

Cash Debit 1105

Receivable Credit 1105

3)Measurement attribute:-Matching principle.

Recognise Revenues when they are earned and Expenses when incurred

4)By following the approach given in points 1 and 2, the matching principle is abided.

It recognise the revenue fully when car is sold and makes the contra revenue adjustment, only later.