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 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 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.

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

20th Edition

ISBN:9780357110362

Author:Murphy

Publisher:Murphy

Chapter5: Introduction To Business Expenses

Section: Chapter Questions

Problem 39P

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