Assume a contract for the sale of goods specifies that payment is to be made 15 months prior to 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?
A) Recognize interest expense.
B) Recognize interest revenue.
C) Recognize additional cost of goods sold.
D) Ignore the time value of money.

Question

Quizplus · Accepted Answer

If the payment is made fifteen months prior delivery, the contract includes a financing component whereby the seller is essentially borrowing money from the buyer. And, since the payment is outside one year of delivery, the financing component is viewed as significant, so interest expense is recognized.

Assume a Contract for the Sale of Goods Specifies That