Question

M Motors (henceforth "ZM") entered into a contract with a customer, Mr Mxenge. As per the contract, ZM will deliver a vehicle to Mr Mxenge on 1 March 2023. The vehicle comes with a "free" 3-year maintenance plan. The services the vehicle and replaces worn parts every six months starting on 30 September 2023. As per the contract, Mr Maitland will pay ZM a once off amount of R800 000 on 28 February 2025. ZM sells similar vehicles a standalone price of R750 000, which is a comparable to the price charged by is competitors. ZM also sells maintenance contracts at a standalone price of R100 000. Identical maintenance plans can also be bought from ZM's competitor's. A market related interest rate is 11%.

True of false, ZM will recognise revenue of R635 930 on 1 March 2023?
a.True
b.False

Answer 1

False, ZM will not recognize revenue of R635 930 on 1 March 2023 since the correct revenue figure requires a detailed present value computation considering the standalone selling prices and the time value of money at an 11% interest rate.

Step-by-step explanation:

False, ZM will not recognize revenue of R635 930 on 1 March 2023. In accounting terms, revenue recognition for a contract that includes both a product and a service (in this case, a vehicle and a maintenance plan) should be allocated based on the standalone selling prices of each component. Here, the standalone selling price of the vehicle is R750,000 and the maintenance plan is R100,000, totaling R850,000. This total must be adjusted for the time value of money because the payment will be received in the future, on 28 February 2025.

Using a market-related interest rate of 11%, this total would be discounted to determine the present value of the amount to be recognized as revenue on the delivery date of 1 March 2023. The correct calculation of present value using the interest rate and the timing of the payment would not result in the given revenue figure of R635 930. Therefore, it requires a detailed computation considering the time value of money to arrive at the correct revenue to be recognized as per the financial standards.