Shifty Beaver Transmission Company enters into a contract with a major U. S. auto manufacturer to design and produce four- speed transmissions for small SUV s. Under the terms of the contract, Shifty Beaver will deliver the transmission immediately but the auto manufacturers will defer payment for four years, the end of the life of the base warranty. The contract price is $ 3,500,000 and the interest rate incurred on similar financing agreements in the industry is 5%.
Required
a. Is there a significant financing component in this contract?
b. If there is a significant financing component, determine the amount of sales revenue and interest revenue to be recognized by Shifty Beaver.