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: YEAR CONTRACT COST Stand Alone Selling Price Construction Service Operation Services Road Resurface 1. 200,000 Forecast cost + 25% 2-5 N/A 15,000 10,000 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.

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: YEAR CONTRACT COST Stand Alone Selling Price Construction Service Operation Services Road Resurface 1. 200,000 Forecast cost + 25% 2-5 N/A 15,000 10,000 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.

CONCEPTS IN FED.TAX.,2020-W/ACCESS

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter3: Income Sources

Section: Chapter Questions

Problem 88P

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