In answering, consider accounting principles and the objectives of accounting.

(Accounting for long-term receivables, LO 2, 3) On May 31, 2005 Namaka Ltd. (Namaka) sold an office building to Audy Inc. (Audy) for $15,000,000. The sale agreement required that Audy pay $3,000,000 to Namaka on May 31, 2005, and then

$4,000,000 on each of May 31, 2006, 2007, and 2008. Namaka decided to recognize the sale of the building in the year ended May 31, 2005.

Required:

a. How much revenue should Namaka recognize as a result of its sale of the office building to Audy? Prepare the journal entry that Namaka should prepare to record the sale. Assume a discount rate of 12%.

b. How much interest revenue will be reported on Namaka’s income statement for the years ended May 31, 2006, 2007, and 2008 as a result of the sale to Audy?
Prepare the journal entry that should be prepared each year to record the interest revenue.

c. How much would be reported as receivable from Audy on Namaka’s balance sheets for the years ended May 31, 2005, 2006, 2007, and 2008? How would the receivable be classified on each year’s balance sheet? Explain your answer.

d. Suppose Namaka insisted on recognizing $15,000,000 as revenue in 2005. What would be the implications for users of its financial statements? Why might Namaka’s management want to report the full $15,000,000 immediately?