The terms of the arrangement require the operator to:Construct a road-completing construction within two yearsMaintain and operate the road for three yearsResurface the road at the end of Year 4The government pays the operator P200 per year in Years 3 to 5 for making the road available to the publicThe road is turn-over to the government at the end of Year 5The operators determine that the implied interest rate is 24.42%.The operator finances the arrangement entirely with debt. The debt proceeds are taken as the contract cost are paid. The debt is payable as follows: 75 in each of years 3 and 4 and P40 in year 5. The effective interest rate is 25.77%The operator makes the following estimates: YearContract CostStand-alone selling priceConstruction Service170Forecast cost + 10% 280Forecast cost + 20%Operation Services3-525Forecast cost + 30%Road resurfacing415Forecast cost + 10%Compute for the profit for year 2.Please show your good accounting form for the solution. Thank you!

Opportunity cost: It is the cost of gain sacrificed when one alternative is selected over the cost…

Answered: The terms of the arrangement require…

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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The terms of the arrangement require the operator to:

Construct a road-completing construction within two years
Maintain and operate the road for three years
Resurface the road at the end of Year 4
The government pays the operator P200 per year in Years 3 to 5 for making the road available to the public
The road is turn-over to the government at the end of Year 5
The operators determine that the implied interest rate is 24.42%.
The operator finances the arrangement entirely with debt. The debt proceeds are taken as the contract cost are paid. The debt is payable as follows: 75 in each of years 3 and 4 and P40 in year 5. The effective interest rate is 25.77%

The operator makes the following estimates:

	Year	Contract Cost	Stand-alone selling price
Construction Service	1	70	Forecast cost + 10%
	2	80	Forecast cost + 20%
Operation Services	3-5	25	Forecast cost + 30%
Road resurfacing	4	15	Forecast cost + 10%

Compute for the profit for year 2.

Please show your good accounting form for the solution. Thank you!

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