Question

Under IAs 18, if four of the five conditions for recognizing revenue from the sale of goods are met, and the entity is certain that 75% of revenue will be recognize as a result, a $100,000 credit sale would be recognized at the time of the sale then

$75,000 of the sale price can be currently recognized and $25,000 will be treated a liability.

explain this answer

Answer 1

Solution:-

$75,000 of the sales price can be currently recognized as revenue and $25,000 will be treated as a deferred revenue (liability).

Explanation:-

Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]

If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11]

Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:

• it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and
• the amount of revenue can be measured with reliability