On 1 January 20X1, the shipowner Kerdonis pays the full price, 500,000, of a tug that the shipyard Plouzac will deliver on 31 December 20X3, i.e. in 3 years. Plouzac has concluded that this advance payment provides it with a significant financing benefit. The rate that would apply in a separate financing transaction from Kerdonis to Plouzac, given Plouzac's credit risk, is 4% (case data); interest is computed on each year's opening balance (teaching assumption). Compute the interest expense for 20X3 and the revenue recognised on delivery.
- Advance payment
- 500,000
- Time until transfer
- 3
- Rate of a separate financing transaction reflecting the shipyard's credit risk
- 4 %