30. A company will receive payments of $8,000 per year for the next five years under a subscription contract. The first payment will be made at the beginning of the contract. Assuming an annual interest rate of 4% is appropriate, the present value of an ordinary annuity is 4.4518 * $8,000 = $35,615 and the present value of an annuity due is 4.6299 * $8,000 = $37,039. Which amount must the company record for this sale in accordance with generally accepted accounting principles (GAAP) if collection is reasonably assured?
Answer: B
The company must record $37,039 for this sale in accordance with GAAP.
The present value of the annuity due, which is $37,039, represents the total amount the company should recognize as revenue from the subscription contract, as the payments begin at the start of the contract and collection is assured.
A) $0
This option is incorrect because recording $0 would imply that the company recognizes no revenue from the subscription contract, which contradicts the fact that payments are assured and will be received.
B) $37,039
This option is correct as it reflects the present value of the annuity due. According to GAAP, the company should record the total expected cash flows from the contract, which is accurately computed as $37,039 based on the annuity due valuation.
C) $35,615
This option is incorrect because it represents the present value of an ordinary annuity. However, since the first payment is made at the beginning of the contract, the annuity due calculation should be used instead.
D) $40,000
This option is incorrect as it exceeds the calculated present value of the annuity due. The amount of $40,000 does not reflect the actual cash flows discounted at the appropriate interest rate.
Conclusion
The correct amount for the company to record is $37,039, which accurately reflects the present value of cash flows from the subscription payments due at the beginning of the contract. Other options either misinterpret the timing of the payments or incorrectly calculate the present value according to accepted accounting principles.