Reference no: EM132717396

Entity B purchases large pieces of vacant land. It sub-divides this land and then sells it off individually as inventory in the ordinary course of business. Due to the nature of its business, the customers repay their accounts over 3 years.
At the end of 20X6, the outstanding customer balance account was $560,000. Management made the following estimates in relation to these balances:

1. 30% chance that credit loss for 12 months would be $10,000
2. 70% chance that credit loss for 12 months would be $12,000
3. 40% chance that the lifetime expected credit loss would be $16,00
4.  60% chance that the lifetime expected credit loss would be $17,000

The risk of default increased significantly since the initial recognition of these customer balances but, at the end of 20X6, there was no indication of impairment.

Problem 1: Which of the following relating to the customer accounts of Entity B is correct?

Option 1: The customers are considered assets as Entity B has a contractual relationships with them and so the balance should be classified as amortised cost.

Option 2: The cash from the customers are economic benefits that can be reliably measured and so the amounts owning should be classified as fair value through profit and loss.

Option 3: The customer accounts are in effect a loan from Entity B and the inflow of economic benefits are probable and so the amounts should be measured at their net realisable value.

Option 4: The inflow of economic benefits satisfy the recognition criteria and should be measured initially at their current cost with fair value changes through other comprehensive income.