The following is an excerpt from Note 2 of Deere & Company’s annual report: “Under the terms of sales agreements with dealers, interest-free periods are determined based on the type of equipment sold and the time of year of the sale. These periods range from one to twelve months for most equipment. … If the interest-free or below market interest rate period exceeds one year, the company adjusts the expected sales revenue for the effects of the time value of money using a current market interest rate. The revenue related to the financing component is recognized in “Finance and interest income” using the interest method. The company does not adjust the sales price to account for a financing component if the expected interest-free or below market period is one year or less.”
Required:
1. Is Deere & Company accounting appropriately for revenue on contracts with interest-free periods of:
a. Less than one year?
b. Greater than one year?
2. Imagine Deere sells two identical tractors, one to SoonCo and one to LaterCo, and in each case records an accounts receivable for the entire sale. The SoonCo receivable is due in 11.5 months. The LaterCo receivable is due in 12.5 months. Neither sales contract specifies any interest associated with the outstanding receivable. Consider the effects of these sales on Deere’s financial statements. Compared to Deere’s sale to LaterCo, how will Deere’s sale to SoonCo’s affect the following?
a. Total receivable at time of sale
b. Sales revenue at time of sale
c. Interest revenue at time of sale
d. Interest revenue in period after sale
e. Cash received upon collection of the receivable
