Question

Big Joe’s Super Cars, Present Value (Revised Revenue Guidance) Big Joe’s Super Cars has just sold a luxury car to customer Tim. 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 transferred to Tim when Tim signed the contract and drove off the lot. If Tim had obtained separate financing (say, a bank loan) for the purchase of the car, his interest rate would have been 6%. What amount of revenue should Big Joe’s record at the date of sale? What guidance should Big Joe’s apply to the subsequent measurement of its receivable? Next, reflect upon what measurement attribute is being used to record Big Joe’s revenues. How does this approach achieve the objective of this measurement attribute? Hint: This example will require you to perform computations. You might find it useful to use Microsoft Excel’s formula options: PMT and PV. Excel walks you through how to input numbers into each formula. What is the authoritative guidance in the FASB Codification

Answer 1

SOLUTION:

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: DEBIT 2607 ( expense)

Credit contra Revenue 2607

DEBIT 1105 (cash)

Credit 1105 (Receivable)

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