For CPA_Far-F1-M3:

could you please help me to explain the answer ($4000*1/(1.08)^3)

thank you!

FAR F1 M3 - Revenue Recognition: Part 1 receiving goods or services transferred by the customer. Example 4 Time Value of Money Over Facts: On January 1, Year 5, SDF sold furniture to a customer for $4,000 with three years' interest-free credit. The customer took delivery of the furniture on that day. The $4,000 I year is payable to SDF on December 31, Year 7. The applicable discount rate based on the customer's credit profile is 8 percent Required: Determine the transaction price for the sale of furniture. Discount Solution: The transaction price is $3.175($4,000 x 1/(1.08)) because the time value of money must be considered when determining the transaction price. Note that interest income will also be recognized each year as follows: Recognized Year 5: $3,175 x 8 %-$254 $4,000 Interest Year 6: ($3,175 + $254) x 8%-$274 Income Year 7: ($3,175 + $254 + $274) x 8 % -$296