Question

On 1/1/X1, Tractor Co. sold a new combine to Jim’s U-Pick farm. The purchase agreement 8.4 establishes a base price of $100,000, plus a contractual interest rate of 5%, payable in 48 monthly installments of $2,302.93. Control of the combine transferred to Jim when Jim signed the contract and had the combine delivered

that same day. If Jim had obtained separate financing (say, a bank loan) for the purchase, his interest rate would have

been 6%.

What amount of revenue should Tractor Co. record at the date of sale? What guidance should Tractor Co. apply

to the subsequent measurement of its receivable?

Consider the measurement attribute used to record Tractor Co.’s revenues. How does this approach achieve the

objective of this measurement attribute?

Answer 1

1. Present value of the lease payments:

In excel or financial calculator using PV function:

=-PV(5%/12,48,2302.93) = 100,000

Amount of revenue Tractor Co. should record at the date of sale = 100,000+ 100,000 = 200,000

As per FASB ASC 842-30-30-1 describes the lessor's net investment in sale type lease. The lease receivable is measured at present value using the discount rate implicit in the lease. The cash flows discounted include the annual lease payments and any guaranteed or unguaranteed residual value (if any).

After recognition of the lease reciavble, a lessor shall measure the net investment in lease using the FASB ASC 842-30-35-1 guidance. The lessor shall do the following:

(i )Increase the carrying amount so as to reflect the interest income on the net investment in the lease.

(ii). Reduce the carrying amount to reflect the lease payments collected during the period.

2. The measurement attribute used to record Tractor Co.’s revenues is the present value approach. The present value approach is used since the lease payments are received over time and discounting cash flows is a prudent way of measuring the actual value of future cash flows. This approach rightly considers the inflation factor since the value of money decreases each year.