When Goods Are Sold on Extended Credit There Is an Implicit

question 44

Multiple Choice

When goods are sold on extended credit there is an implicit financing arrangement contained in the sale agreement.In order to separate the financing element from the sale,it is necessary to calculate the applicable interest rate inherent in the agreement.What advice does IASB (2011) provide about this?

• A) The implicit rate of interest is the more clearly determinable of either: (a) the prevailing rate of a similar instrument of an issuer with a similar credit rating; or (b) a rate of interest that discounts the nominal amount of the instrument to the current cash sales price of the goods or services.
• B) The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset.
• C) The implicit rate of interest is the more reliably determinable of either: (a) the prevailing rate of a debt instrument of an issuer adjusted to the organisation-specific, risk adjusted rate of the issuer; or (b) a rate of interest that discounts the sales price to the fair market value of the goods or services.
• D) The implicit rate of interest is the internal rate of return implicit in the contract such that the sales price is equal to the fair market value of the asset. This rate may have to be adjusted to take account of the risk of the issuer if it is significantly different to the market-determined interest rate for similar entities.

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Definitions:

Present Value

The present valuation of money to be received in the future or recurrent cash inflows, accounting for a chosen rate of interest.

Compounded Annually

Interest on an investment or loan calculated once a year, where each year's interest payment includes interest on the original principal and on the accumulated interest of previous periods.

Market Rate

The prevailing rate or price at which goods, services, or securities are traded in a competitive marketplace.

Bond Issue

The method through which a corporation or governmental entity generates capital by issuing bonds to investors.