On 1 January 20X1, Pradelles receives an advance of 200,000 for a custom-made tank that it will deliver in 2 years. It has concluded that there is a significant financing component; the rate that would apply in a separate financing transaction from the customer to Pradelles, given Pradelles' credit risk, is 5% (case data). Interest is computed on the opening balance of the contract liability (teaching assumption). Compute the interest expense for 20X1 and the revenue recognised on delivery.
- Advance received
- 200,000
- Time until delivery
- 2
- Rate of a separate financing transaction reflecting the entity's credit risk
- 5 %