Reference no: EM132602580
Question - GMA, the operator, enters into a service concession agreement with ABS-CBN, the grantor, for 10 years. The terms of the arrangement require an operator to construct a road, completing construction within two years and maintain and operate the road to a specified standard eight years (i.e. years 3-10). At the end of year 10, the arrangement will end. The operator estimates that the costs it will incur to fulfill its obligations will be:
|
Contract Costs
|
Year
|
Amount
|
|
Construction services
|
1
|
$500
|
|
|
2
|
500
|
|
Operation services
|
3-10
|
10
|
The terms of the arrangement allow the operator to collect tolls from drivers using the road. The operator forecasts that vehicle numbers will remain constant over the duration of the contract and that it will receive tolls of $200 in each of years 3-10. The total consideration reflects the fair values for each services, which are:
Fair values of the consideration received or receivable:
Construction services Forecast cost + 5%
Operation services Forecast cost + 20%
Effective interest rate 6.18% per year
I. How much is the intangible asset at end of Year 2?
II. How much is the total revenue in Year 3?
III. How much is the total amortization expense in Year 4 using straight-line method?