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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 1 P200,030 Forecast cost * 25% Operation Services 2-5 15,000 N/A Road Resurface 3 10,000 N/A Problem 1: 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.
Year
Contract Cost
Stand Alone Selling Price
Construction Service
1
P200,030
Forecast cost * 25%
Operation Services
2-5
15,000
N/A
Road Resurface
3
10,000
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