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?

Rationale

$37,039 must be recorded for this sale in accordance with GAAP.

Under generally accepted accounting principles (GAAP), when a company receives payments at the beginning of a subscription contract, it must recognize the present value of the cash flows. Since the first payment is made at the contract's start, the present value of the annuity due, which is $37,039, should be recorded.

A ($0) YOUR ANSWER

Recording $0 would not accurately reflect the value of the contract, as the company is assured of receiving future payments. GAAP requires that the present value of future cash inflows be recognized, which is far greater than zero.

B ($37,039) CORRECT

This amount represents the present value of the annuity due, calculated with the first payment made at the beginning of the contract period. This figure accurately reflects the value of the expected cash flows and complies with GAAP for recognizing revenue.

C ($35,615) YOUR ANSWER

This figure represents the present value of an ordinary annuity, where payments occur at the end of each period. Since the first payment in this scenario is made at the beginning, using this present value would understate the recognized revenue in accordance with GAAP.

D ($40,000) YOUR ANSWER

Recording $40,000 would overstate the company's revenue by not accounting for the time value of money. GAAP requires companies to recognize revenue based on the present value of future payments, and $40,000 does not reflect the discounted cash flows correctly.

Conclusion

In summary, under GAAP, the company should record $37,039 for the sale, representing the present value of the annuity due. This value appropriately accounts for the timing of the cash flows, ensuring that financial statements accurately reflect the company's expected future income from the subscription contract.

$37,039 must be recorded for this sale in accordance with GAAP.

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