Question

Assume a contract for the sale of goods specifies that payment is to be made four 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?

		Recognize interest expense.
		Recognize additional cost of goods sold.
		Ignore the time value of money.
		Recognize interest revenue.

TechTrex Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue:

		When Techtrex delivers a computer to a customer, ignoring potential returns.
		When Techtrex delivers a computer to a customer, in an amount that is reduced by the expected returns.
		When Techtrex receives cash from the customer.
		When a customer returns a computer.

Answer 1

Answer: Ignore the time value of money

When the contract for the sale of goods specifies that the payment is to be made four months after the delivery of a product, the seller will consider the time period given to make payment as a credit period and ignore the time value of money.

TechTrex Computer Company

Answer: When TechTrex delivers a computer to a customer, in an amount that is reduced by the expected returns.

TechTrex would recognize the revenue when the computer is delivered to a customer and it would record the expected sales returns based on the estimates from previous years.