14. A company will receive payments of $1,500 per year for the next four years under a subscription contract. The first payment will be made at the beginning of the contract. Assuming an annual interest rate of 3% is appropriate. The present value of an ordinary annuity is 3.71710 * $1,500 = $5,576, and the present value of an annuity due is 3.82861 * $1,500 = $5,743. Which amount must the company record for this sale in accordance with generally accepted accounting principles (GAAP) if collection is reasonably assured?
Answer: A
The company must record $5,743 for this sale in accordance with GAAP.
Since the first payment is made at the beginning of the contract, the present value of the annuity due is applicable. Therefore, the correct amount to record is $5,743.
A) $5,743
This option is correct because it represents the present value of an annuity due, which is appropriate in this context since the first payment occurs at the start of the contract. According to GAAP, the amount recorded should reflect the present value of future cash flows, and in this case, that amount is $5,743.
B) $0
This option is incorrect because recording zero would imply that no value is associated with the future cash flows from the subscription contract. Given that payments are assured, a value must be recorded, indicating that this choice does not follow GAAP.
C) $6,000
This option is incorrect as it does not represent the present value of the cash flows. The total of the cash flows ($1,500 per year for four years) is $6,000, but this does not account for the time value of money. GAAP requires the present value to be recorded, not the nominal future value.
D) $5,576
This option is incorrect because it represents the present value of an ordinary annuity, which is not applicable in this scenario where the first payment occurs at the beginning of the contract. The correct method for calculating the present value in this context is to use the annuity due calculation.
Conclusion
The company should record $5,743 for the sale as it accurately reflects the present value of the future cash flows from the subscription contract under GAAP. All other options fail to meet the criteria for recording the appropriate present value, either by misrepresenting the timing of the payment or not accounting for the time value of money. Thus, option A is the only correct choice.