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FINANCIAL ACCOUNTING
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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ABC Co. 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 four 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 P200,000 per year. The contract ends in year 5. The operator estimates that the resurfacing expenditure increases by P5,000 for each year that the road is used. The appropriate discount rate is 10%. At contract inception, ABC Co. identifies a single performance obligation for construction services. ABC Co. makes the following estimates: CONTRACT COST Stand Alone Selling Price Forecast cost + 25% YEAR Construction Service 1 200,000 15,000 10,000 Operation Services 2-5 N/A Road Resurface 3 N/A At the start of year 1, ABC Co. 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.
Transcribed Image Text:ABC Co. 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 four 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 P200,000 per year. The contract ends in year 5. The operator estimates that the resurfacing expenditure increases by P5,000 for each year that the road is used. The appropriate discount rate is 10%. At contract inception, ABC Co. identifies a single performance obligation for construction services. ABC Co. makes the following estimates: CONTRACT COST Stand Alone Selling Price Forecast cost + 25% YEAR Construction Service 1 200,000 15,000 10,000 Operation Services 2-5 N/A Road Resurface 3 N/A At the start of year 1, ABC Co. 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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