BACKGROUND

An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two years (that is, the performance obligation will be satisfied at a point in time). The contract includes 2 alternative payment options: payment of $5,000 in 2 years when the customer obtains control of the asset or payment of $4,000 when the contract is signed. The customer elects to pay $4,000 when the contract is signed. The entity concludes that the contract contains a significant financing component because of the length of time between when the customer pays for the asset and when the entity transfers the asset to the customer, as well as the prevailing interest rates in the market. The interest rate implicit in the transaction is 11.8 percent, which is the interest rate necessary to make the 2 alternative payment options economically equivalent. However, the entity determines that, in accordance with paragraph 606-10-32-19, the rate that should be used in adjusting the promised consideration is 6 percent, which is the entitys incremental borrowing rate. The following journal entries illustrate how the entity would account for the significant financing component. a. Recognize a contract liability for the $4,000 payment received at contract inception.

Cash $ 4,000

Contract Liability $ 4,000

During the 2 years from contract inception until the transfer of the asset, the entity adjusts the promised amount of consideration (in accordance with paragraph 606-10-32-20) and accretes the contract liability by recognizing interest on $4,000 at 6 percent for 2 years.

Interest expense $ 494(a)

Contract liability $ 494

(a) $494 = $4,000 contract liability x (6 percent interest per year for 2 years)

MY QUESTION

How did they get $494? When I did 4,000 x .06 x 2, I got 480