When Goods Are Sold on Extended Credit There Is an Implicit

question 53

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 interest rate inherent in the agreement.What advice does AASB 118 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.
• E) None of the given answers.

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