The transaction price must reflect the time value of money if: A. The vendor expects the period between customer payment and delivery of goods or services will be less than two years. B. The contract has a financing component that is significant to the contract. C. The interest rate in the contract is higher than 13%. D. Consideration would not differ if paid in cash or under normal credit terms.

Question

Bootie

Business

8 August, 00:26

The transaction price must reflect the time value of money if: A. The vendor expects the period between customer payment and delivery of goods or services will be less than two years. B. The contract has a financing component that is significant to the contract. C. The interest rate in the contract is higher than 13%. D. Consideration would not differ if paid in cash or under normal credit terms.

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Answers (1)

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Jaylee · Answer 1

The correct answer is letter "B": The contract has a financing component that is significant to the contract.

Explanation:

Time value of money is a principle that states that today's dollar is worth more than tomorrow's dollar. This is because the money that could be received today may be deposited in a savings bank account or invested which implies that the initial sum has the potential to grow. If the same amount is received in later dates, the sum it could grow is likely to be lower.

Therefore, if in a contract there is a financing component which implies considering an interest rate, the time value of money is to be included.