Accounting · Financial Reporting Principles
On 1 December 20X4, Sam Co enters into a contract to sell a specialized machine to a customer for $500,000. Sam Co provides a 2-year interest-free credit period for the full amount, which is not standard for this industry. The machine was delivered and control passed on the same date. The company's accountant recorded the full $500,000 as revenue in the year ended 31 December 20X4. Which of the following statements correctly identifies the impact of this treatment on the fundamental qualitative characteristics of the financial statements?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1The treatment violates Relevance because interest-free periods are considered 'one-off' items that should be ignored for decision-making.
- 2The treatment enhances Verifiability as the revenue recorded exactly matches the signed legal agreement.
- 3The treatment violates Faithful Representation because it fails to account for the economic substance of a significant financing component.✓
- 4The treatment supports Relevance as it reflects the full legal contract price intended to influence user decisions.
Correct answer
The treatment violates Faithful Representation because it fails to account for the economic substance of a significant financing component.
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