Income Recognition with Noninterest-Bearing Notes On December 31, 2000, Video Systems, Inc., completed installing an instant video and surround-sound speaker system at a new arena football league stadium. Video System’s cost of installation was $350,000, and the agreed upon price was $600,000. However, the owners of the stadium are short of cash, and some accommodation might be needed for Video Systems to receive payment. I. M. Sharp, one of the owners of the stadium, is sure it will become profitable with the help of the new video system. He has proposed that Video Systems accept as full payment a 5-year noninterest-bearing note for the $600,000 price. Video Systems can earn an 8 percent return on money it has to invest. The present value of the note at December 31, 2000, is $408,348. As the controller of Video, you are asked to provide answers to the following questions regarding the sale on credit:

a. Assuming Video Systems recognizes sales revenue on completing the system installation, what amount of revenue should be recognized on December 31, 2000?

b. If Video Systems had no other video installations during 2000, what amount of net income would the company report for the year?

c. What amount of interest income should Video Systems recognize in 2000 and each of the following 5 years?

d. The sales manager of Video Systems thinks that the full

$250,000 ($600,000 — $350,000) of profit should be reported in 2000, since that is when the entire installation process was completed. Explain why it is not appropriate to do so under generally accepted accounting principles.

e. After your analysis, would you recommend that Video Systems undertake an identical project next period, providing the same financing terms? Explain.