On July 31, 2016 Romanace Ltd. (Romanace) agreed to sell Youbou Inc. (Youbou) $12,000,000 of specialized equipment for use at its newly developed mine site in northern Manitoba. Because the mine hasn’t begun production, the parties agreed that Youbou would pay for the equipment on August 6, 2018, at which time the mine would be generating the cash flow needed to pay Romanace. Despite the fact Romanace wouldn’t be receiving its cash for two years it decided to recognize the revenue from the sale during the year ended July 31, 2016. The agreement between Romanace and Youbou states that Youbou doesn’t have to pay any interest on the amount owed. The market rate of interest for an arrangement of this type is 10 percent.

Required:

a. How much revenue should Romanace recognize in the year ended July 31, 2016, for the sale to Youbou? Prepare the journal entry that Romanace should prepare to record the sale.

b. What amount would be reported on Romanace’s July 31, 2016 balance sheet for accounts receivable as a result of the sale to Youbou? How would the receivable from Youbou be shown on the balance sheet? Explain your answer.

c. How much interest revenue should Romanace report on its July 31, 2017 and 2018 income statements as a result of the sale to Youbou? Prepare the journal entry that Romanace would make to record the interest revenue each year. What amount would be shown as receivable from Youbou on Romanace’s July 31, 2017 and 2018 balance sheets? How would the receivable from Youbou be classified on the balance sheet each year?

d. What journal entry would Romanace make when it received payment in full on August 6, 2018?

e. Suppose that instead of being an interest free arrangement Youbou agreed to pay 10 percent interest per year, payable on July 16 each year. What amount of revenue should Romanace recognize in fiscal 2016?