Arusha signed a contract (for an initial three years) in August 2021 with a company called Media Today to a install a satellite dish and cabling system to a newly built group of residential apartments. Media Today will provide telephone and television services to the residents of the apartments via the satellite system and pay Arusha 50,000ZMW per month from December 2021. Work on the installation commenced on 1 September 2021 and expenditure to 30 September 2021 was 58,000ZMW. The installation is expected to be completed by 31 October 2021. Previous experience with similar contracts indicates that Arusha will make a total profit of 40,000ZMW over the three years on this initial contract. The assistant correctly recorded the costs to 30 September 2021 of 58,000 as a non-current asset, but then wrote this amount down to 40,000ZMW (the expected total profit) because he believed the asset to be impaired. The contract is not a finance lease. Ignore discount. Required Comment on the assistant’s treatment of the above in the financial statements for the year ended 30 September 2021 and advise him how it should be treated under International Financial Reporting Standards.
- The same accounting assistant has encountered the following matter during the preparation of the draft financial statements of Arusha for the year ended 20 September 2021. He has given an explanation of his treatment of them.
Arusha signed a contract (for an initial three years) in August 2021 with a company called Media Today to a install a satellite dish and cabling system to a newly built group of residential apartments. Media Today will provide telephone and television services to the residents of the apartments via the satellite system and pay Arusha 50,000ZMW per month from December 2021. Work on the installation commenced on 1 September 2021 and expenditure to 30 September 2021 was 58,000ZMW. The installation is expected to be completed by 31 October 2021. Previous experience with similar contracts indicates that Arusha will make a total profit of 40,000ZMW over the three years on this initial contract. The assistant correctly recorded the costs to 30 September 2021 of 58,000 as a non-current asset, but then wrote this amount down to 40,000ZMW (the expected total profit) because he believed the asset to be impaired.
The contract is not a finance lease. Ignore discount.
Required
Comment on the assistant’s treatment of the above in the financial statements for the year ended 30 September 2021 and advise him how it should be treated under International Financial Reporting Standards.
The contract is in the nature of an intangible asset as it is a financial asset which is created out of the past event and the future economic benefits are likely to flow into the enterprise.
Further, this contract is clearly separable from other contracts. And this contract is likely to bring economic benefits to the company.
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