Question:
Patterson, Inc. receives a $10,000 payment two years in advance of delivering a completed novel. A five
percent interest rate applies. How much revenue would Patterson recognize associated with delivery of
the novel, assuming delivery occurs on time?
Answer:
Patterson initially would record the payment as unearned revenue. Then Patterson would accrue
interest expense of $10,000 x 5% = $500 in year one of the contract, and interest expense of
($10,000 + 500) x 5% = $525 in year two of the contract, in each case debiting interest expense
and crediting unearned revenue. Therefore, at the point in time Patterson delivers the novel, it
would have unearned revenue totaling $10,000 + 500 + 525 = $11,025, and would recognize that
amount as revenue.
Patterson, Inc. receives a $10,000 payment two years in advance of delivering a completed novel. A five
percent interest rate applies. How much revenue would Patterson recognize associated with delivery of
the novel, assuming delivery occurs on time?
Answer:
Patterson initially would record the payment as unearned revenue. Then Patterson would accrue
interest expense of $10,000 x 5% = $500 in year one of the contract, and interest expense of
($10,000 + 500) x 5% = $525 in year two of the contract, in each case debiting interest expense
and crediting unearned revenue. Therefore, at the point in time Patterson delivers the novel, it
would have unearned revenue totaling $10,000 + 500 + 525 = $11,025, and would recognize that
amount as revenue.
