Question

A company performs services for a customer in exchange for a noninterest-bearing note. The customer agrees to make a payment of $100,000 in three years. Using a 5% interest rate, the implied annual interest is $100,000 × 0.05 = $5,000, and the present value of the note is $100,000 × 0.86384 = $86,384. Which amount must this company record as service revenue from this transaction in accordance with generally accepted accounting principles (GAAP)?

Answer 1

The amount this company must record as service revenue from this transaction in accordance with GAAP is $86,384.How to calculate the amount to be recorded as service revenue?The company is receiving a non-interest-bearing note, and the customer agrees to pay $100,000 in three years, using a 5% interest rate. The implied annual interest is $100,000 × 0.05 = $5,000. To compute the present value of the note, the company will use a discount rate of 5% and a discount factor of 0.86384 (as obtained from a table of present values) as follows:Present Value = Payment Amount × Discount FactorPresent Value = $100,000 × 0.86384Present Value = $86,384Therefore, the amount that the company must record as service revenue from this transaction in accordance with GAAP is $86,384.