Abot Company, a private contractor, wins a bid to construct a railway for the government. The terms of the arrangement are as follows: -Construct a road-completing construction within a year -Maintain and operate the road for 4 years -Resurface the road when the original surface has deteriorated below specified condition. The operator estimates that it will have to undertake the resurfacing at the end of year 3. The operator collects toll fees of $200,000 per year. The contract ends in Year 5. The operator estimates that the resurfacing expenditure increases by $5,000 for each year that the road is used. The appropriate discount rate is 10%. At contract inception, Abot Company identifies a single performance obligation for construction services. Abot Company makes the following estimates: Stand Alone Selling Price Forecast cost + 25% N/A N/A Year Contract Cost Construction Service Operation Services Road Resurface 1 2-5 3 200,000 15,000 10,000 At the start of Year 1, Abot Company obtains a 4-year, 10% P200,000 bank loan to help finance the arrangement. The principal and interest on the loan matures in lump sum. Compute for the net income for Year 3.

Abot Company, a private contractor, wins a bid to construct a railway for the government. The terms of the arrangement are as follows: -Construct a road-completing construction within a year -Maintain and operate the road for 4 years -Resurface the road when the original surface has deteriorated below specified condition. The operator estimates that it will have to undertake the resurfacing at the end of year 3. The operator collects toll fees of $200,000 per year. The contract ends in Year 5. The operator estimates that the resurfacing expenditure increases by $5,000 for each year that the road is used. The appropriate discount rate is 10%. At contract inception, Abot Company identifies a single performance obligation for construction services. Abot Company makes the following estimates: Stand Alone Selling Price Forecast cost + 25% N/A N/A Year Contract Cost Construction Service Operation Services Road Resurface 1 2-5 3 200,000 15,000 10,000 At the start of Year 1, Abot Company obtains a 4-year, 10% P200,000 bank loan to help finance the arrangement. The principal and interest on the loan matures in lump sum. Compute for the net income for Year 3.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Contract Costing

Contract costing is about tracing particular costs related to a particular contract entered into with the customer. It is one of the forms of job order costing. It is useful in long-term contracts at the most. It is seen that substantial time is required for the completion of the contract which takes different accounting periods. Thus, it is very much helpful for recognizing the costs associated with it and accounting in their specific accounting periods.

Question

Abot Company, a private contractor, wins a bid to construct a railway for the government. The
terms of the arrangement are as follows:
-Construct a road-completing construction within a year
-Maintain and operate the road for 4 years
-Resurface the road when the original surface has deteriorated below specified
condition. The operator estimates that it will have to undertake the resurfacing at the
end of year 3.
The operator collects toll fees of $200,000 per year. The contract ends in Year 5. The operator
estimates that the resurfacing expenditure increases by $5,000 for each year that the road is
used. The appropriate discount rate is 10%. At contract inception, Abot Company identifies a
single performance obligation for construction services. Abot Company makes the following
estimates:
Stand Alone Selling
Price
Forecast cost + 25%
N/A
N/A
Year
Contract Cost
Construction Service
Operation Services
Road Resurface
1
2-5
3
200,000
15,000
10,000
At the start of Year 1, Abot Company obtains a 4-year, 10% P200,000 bank loan to help
finance the arrangement. The principal and interest on the loan matures in lump sum.
Compute for the net income for Year 3.

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