Compare between your answers to requirements income statement and balance sheet above with U.S. GAAP and uses the percentage of completion method , under IFRSand uses the cost recovery method and write a brief memo explaining which set of financial statements (those prepared according to IFRS or U.S. GAAP) is likely to produce a better operating income (loss).

Lusail Company builds office buildings. The office buildings are constructed under contract with reputable buyers. During 2016, Lusail Company began construction of an office building for AlKhor Corporation. The total price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: the year 2016 2017 2018 2019 2020 2021 Costs incurred during the year $2,000,000 2,000,000 4,750,000 4,750,000 Estimated costs to complete as of Billings during Cash collections year-end during the year $6,000,000 $1,000,000 $900,000 6,000,000 1,000,000 900,000 1,250,000 5,000,000 4,300,000 1,500,000 3,000,000 4,300,000 656,250 4,000,000 4.800,000 0 4,000,000 4,800,000 2,250,000 2,250,000 a To properly fulfil the above construction project, Lusail Company leased a machine from an Qatar Leasing Corporation on June 30, 2018. The lease agreement calls for Lusail Company to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Lusail Company's incremental borrowing rate is 10%, the same rate Qatar Leasing uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each financial year. The fair value of the machine is $3 million In addition, Lusail Company issued on January 1, 2019 $1,500,000, 4%, 5-year bonds. Interest on the bonds is paid semimanual on June 30 and December 31. The market interest for bonds of similar risk and maturity was 6%. Lusail Company was aware that according to the U.S. GAAP, companies are allowed to switch from the effective interest method to fair value method with little justification. On December 31, 2020, the market interest rate increased to 8%, thus prompting Lusail Company to switch to the fair value method to account for its bonds. On the same date, the fair value of the bond issue was estimated at $1,342,735. Although, IFRS does allow the use of fair value to account for liabilities, there are many restrictions and requirements. Unfortunately, Lusail Company did not meet these requirements; a matter that enforced the company to follow the effective interest method in reporting for its bonds in the financial statements instead of the fair value method. 4 20.000.000 2,000,000 5 6 Contract Price Cost Incurred During The Year Cost Incurred in Prior Year Actual Cost To Date Estimiate Cost To Complete Total Actual and Estimated Costs 20.000.000 2,000,000 2.000.000 4,000,000 6.000.000 10,000,000 20.000.000 4,750,000 4,000 000 8,750,000 1,250,000 10.000.000 20,000,000 4,750,000 8.750,000 13,500,000 1,500,000 15,000,000 20.000.000 2,250,000 13,500,000 15,750,000 656.250 16,406,250 7 8 2,000,000 6,000,000 8.000.000 9 10 Total Gross Profit 12,000,000 10,000,000 10,000,000 5,000,000 3,593,750 11 12 13 14 Percentage of Completion 2,000,000 8,000,000 4,000,000 10.000.000 8,750,000 10,000,000 13,500,000 15,000,000 15,750,000 16,406,250 15 16 25.0% 40.0% 87.59 90.0% 96.0% 17 18 3,000,000 3,450,000 19 Gross Profit Earned To Date Gross Profit In Prior Year Gross Profit 4,000,000 3,000,000 1,000,000 8,750,000 4,000,000 4,750,000 4,500,000 8.750,000 (4,250,000 4,500,000 (1,050,000) 20 3,000,000 21 22 23 24 25 26 2016 2,000,000 2017 2,000,000 2018 4,750,000 2019 4,750,000 2020 2,250,000 27 Construction In Progress Various Accounts 28 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 29 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 30 31 32 Accounts Recivables Billings On Construction In Progress 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 33 Cash 900,000 900,000 4,300,000 4,300,000 4,800,000 34 Accounts Recivables 900,000 900,000 4,300,000 4,300,000 4,800,000 35 36 Construction in Progress Construction Cost Revenue From Long Term Contracts 3,000,000 2,000,000 1,000,000 2,000,000 4,750,000 4,750,000 14,250,000) 4,750,000 (1,050,000 2,250,000 37 38 5,000,000 3,000,000 9,500,000 500,000 1 200,000 39 40 20,000,000 Billings On Construction In Progress Construction In Progress 41 20,000,000 42 43 44 45 46 47 48 49 50 51 52 53 Balance Sheet 54 2016 2020 55 56 Assets Accounts Receivable 100,000 200,000 57 58 59 Construction On Progress (-) Billings In Construction On Progress Cost And Profit In Excess Of Billings 5,000,000 1,000,000 19,200,000 16,000,000 60 4,000,000 3,200,000 61 62 63 84 Income Statement 85 2016 2020 66 67 5,000,000 1,200,000 68 Total Revenue (-) Construction Costs ( Net Income 2,000,000 2.250.000 69 3,000,000 (1,050,000) 70 71 72 B C D E F G H 0 1 2016 2017 2018) 2019 2020 2021 2 contract price 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 3 construction costs incurred during year 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 4 prior construction costs 0 2,000,000 4,000,000 8,750,000 13,500,000 15,750,000 5 cumulative construction costs 2,000,000 4,000,000 8,750,000 13,500,000 15,750,000 18,000,000 6 estimated costs to be completed 6,000,000 6,000,000 1,250,000 1,500,000 656,250 7 actual + estimated costs 8,000,000 10,000,000 10,000,000 15,000,000 16,406,250 18,000,000 8 estimated gross profit 12,000,000 10,000,000 10,000,000 5,000,000 3,593,750 2,000,000 9 percentage completed 25% 40% 87.50% 90% 96% 100% 10 cumulative gross profit 3,000,000 4,000,000 8,750,000 4,500,000 3,450,000 2,000,000 11 gross profit in prior years 0 3,000,000 4,000,000 8,750,000 4,500,000 3,450,000 12 gross profit per year 3,000,000 1,000,000 4,750,000 -4,250,000 -1,050,000 -1,450,000 13 14 JOURNAL ENTRIES 15 2016 2017 2018 2019 2020 2021 16 Construction in progress 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 17 Various accounts 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 18 Accounts receivable 19 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 4,000,000 20 Billing on contracts 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 4,000,000 21 Cash 22 900,000 900,000 900,000 4,300,000 4,300,000 4,800,000 4,800,000 900,000 4,300,000 4,300,000 4,800,000 4,800,000 A/R 23 24 Construction in progress 25 Construction costs 26 0 0 0 0 0 2,000,000 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 4,250,000 Revenue from long term contract 27 Billings on construction contract 28 Contstruction in progress 20,000,000 20,000,000 29 30 C D E F G H j dicount ammortization schedule date 1/1/2019 30/6/19 31/12/19 30/6/20 31/12/20 cash interest effetive interest increase in balance outstanding balance $1,372,041 $30,000 $41,161 $11,161 $1,383,202 $30,000 $41,496 $11,496 $1,394,698 $30,000 $41,841 $11,841 $1,406,539 $30,000 $42,196 $12,196 $1,418,735 A B 1 principal 1116135 2 interest 255906 3 selling price 1372041 4 4 5 6 book value on 31/12/2020 $1,418,735 7 fair value on 31/12/2020 $1,342,735 8 8 9 JOURNAL ENTRIES 10 1/1/19 11 cash discount on bonds payable 12 bonds payable 13 14 30/6/19 interest expense 15 discount on bonds payable 16 cash 17 31/12/19 18 interest expense 19 discount on bonds payable 20 cash 42,196 1,372,041 127,959 1,500,000 31/12/20 interest expense discount on bonds payable cash FV MV (31/12/2020) unrealised gain 1,342,735 1,418,735 76,000 2,196 30,000 41,161 31/12/20 fair value option unrealised gain 76,000 11,161 30,000 76,000 41,496 11,496 30,000 21 22 41,841 30/6/20 interest expense discount on bonds payable cash 23 11,841 30,000 24 25 26 A A B D E w N 00 1 Date Payment Effective interest rate decrease in balance outstanding balance 2 6/30/2018 3000000 3 6/30/2018 5629071 562907 2437093 4 12/30/2018 5629071 121855 441052 1996041 5 6/30/2019 562907 99802 463105 1532936 6 12/30/2019 562907 76647 486260 10466751 7 6/30/2020 562907 52334 510573 536102 8 12/30/2020 5629071 26805 536102 0 9 3377442 377442 3000000 10 11 JOURNAL ENTRIES 12 30/6/2018 13 leased equipment 3,000,000 lease payable 3,000,000 14 15 30/6/2018 interest expense 0 16 lease payable 562,907 17 cash 562,907 18 30/12/2018 19 interest expense 121,855 20 lease payable 441,052 cash 562,907 21 22 30/6/2019 23 interest expense 99,802 lease payable 463,105 24 cash 562,907 25 30/12/2019 26 interest expense 76,647 27 lease payable 486,260 cash 562,907 28 29 30/6/2020 30 interest expense 52,334 lease payable 31 510,573 cash 562,907 32 33 30/12/2020 interest expense 26,805 34 lease payable 536,102 35 cash 562,907 36 30/12/2020 37 depreciation expense 1,000,000 38 accumulated depreciation 1,000,000 39 An Lusail Company builds office buildings. The office buildings are constructed under contract with reputable buyers. During 2016, Lusail Company began construction of an office building for AlKhor Corporation. The total price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: the year 2016 2017 2018 2019 2020 2021 Costs incurred during the year $2,000,000 2,000,000 4,750,000 4,750,000 Estimated costs to complete as of Billings during Cash collections year-end during the year $6,000,000 $1,000,000 $900,000 6,000,000 1,000,000 900,000 1,250,000 5,000,000 4,300,000 1,500,000 3,000,000 4,300,000 656,250 4,000,000 4.800,000 0 4,000,000 4,800,000 2,250,000 2,250,000 a To properly fulfil the above construction project, Lusail Company leased a machine from an Qatar Leasing Corporation on June 30, 2018. The lease agreement calls for Lusail Company to make semiannual lease payments of $562,907 over a three-year lease term, payable each June 30 and December 31, with the first payment at June 30, 2018. Lusail Company's incremental borrowing rate is 10%, the same rate Qatar Leasing uses to calculate lease payment amounts. Depreciation is recorded on a straight-line basis at the end of each financial year. The fair value of the machine is $3 million In addition, Lusail Company issued on January 1, 2019 $1,500,000, 4%, 5-year bonds. Interest on the bonds is paid semimanual on June 30 and December 31. The market interest for bonds of similar risk and maturity was 6%. Lusail Company was aware that according to the U.S. GAAP, companies are allowed to switch from the effective interest method to fair value method with little justification. On December 31, 2020, the market interest rate increased to 8%, thus prompting Lusail Company to switch to the fair value method to account for its bonds. On the same date, the fair value of the bond issue was estimated at $1,342,735. Although, IFRS does allow the use of fair value to account for liabilities, there are many restrictions and requirements. Unfortunately, Lusail Company did not meet these requirements; a matter that enforced the company to follow the effective interest method in reporting for its bonds in the financial statements instead of the fair value method. 4 20.000.000 2,000,000 5 6 Contract Price Cost Incurred During The Year Cost Incurred in Prior Year Actual Cost To Date Estimiate Cost To Complete Total Actual and Estimated Costs 20.000.000 2,000,000 2.000.000 4,000,000 6.000.000 10,000,000 20.000.000 4,750,000 4,000 000 8,750,000 1,250,000 10.000.000 20,000,000 4,750,000 8.750,000 13,500,000 1,500,000 15,000,000 20.000.000 2,250,000 13,500,000 15,750,000 656.250 16,406,250 7 8 2,000,000 6,000,000 8.000.000 9 10 Total Gross Profit 12,000,000 10,000,000 10,000,000 5,000,000 3,593,750 11 12 13 14 Percentage of Completion 2,000,000 8,000,000 4,000,000 10.000.000 8,750,000 10,000,000 13,500,000 15,000,000 15,750,000 16,406,250 15 16 25.0% 40.0% 87.59 90.0% 96.0% 17 18 3,000,000 3,450,000 19 Gross Profit Earned To Date Gross Profit In Prior Year Gross Profit 4,000,000 3,000,000 1,000,000 8,750,000 4,000,000 4,750,000 4,500,000 8.750,000 (4,250,000 4,500,000 (1,050,000) 20 3,000,000 21 22 23 24 25 26 2016 2,000,000 2017 2,000,000 2018 4,750,000 2019 4,750,000 2020 2,250,000 27 Construction In Progress Various Accounts 28 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 29 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 30 31 32 Accounts Recivables Billings On Construction In Progress 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 33 Cash 900,000 900,000 4,300,000 4,300,000 4,800,000 34 Accounts Recivables 900,000 900,000 4,300,000 4,300,000 4,800,000 35 36 Construction in Progress Construction Cost Revenue From Long Term Contracts 3,000,000 2,000,000 1,000,000 2,000,000 4,750,000 4,750,000 14,250,000) 4,750,000 (1,050,000 2,250,000 37 38 5,000,000 3,000,000 9,500,000 500,000 1 200,000 39 40 20,000,000 Billings On Construction In Progress Construction In Progress 41 20,000,000 42 43 44 45 46 47 48 49 50 51 52 53 Balance Sheet 54 2016 2020 55 56 Assets Accounts Receivable 100,000 200,000 57 58 59 Construction On Progress (-) Billings In Construction On Progress Cost And Profit In Excess Of Billings 5,000,000 1,000,000 19,200,000 16,000,000 60 4,000,000 3,200,000 61 62 63 84 Income Statement 85 2016 2020 66 67 5,000,000 1,200,000 68 Total Revenue (-) Construction Costs ( Net Income 2,000,000 2.250.000 69 3,000,000 (1,050,000) 70 71 72 B C D E F G H 0 1 2016 2017 2018) 2019 2020 2021 2 contract price 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 20,000,000 3 construction costs incurred during year 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 4 prior construction costs 0 2,000,000 4,000,000 8,750,000 13,500,000 15,750,000 5 cumulative construction costs 2,000,000 4,000,000 8,750,000 13,500,000 15,750,000 18,000,000 6 estimated costs to be completed 6,000,000 6,000,000 1,250,000 1,500,000 656,250 7 actual + estimated costs 8,000,000 10,000,000 10,000,000 15,000,000 16,406,250 18,000,000 8 estimated gross profit 12,000,000 10,000,000 10,000,000 5,000,000 3,593,750 2,000,000 9 percentage completed 25% 40% 87.50% 90% 96% 100% 10 cumulative gross profit 3,000,000 4,000,000 8,750,000 4,500,000 3,450,000 2,000,000 11 gross profit in prior years 0 3,000,000 4,000,000 8,750,000 4,500,000 3,450,000 12 gross profit per year 3,000,000 1,000,000 4,750,000 -4,250,000 -1,050,000 -1,450,000 13 14 JOURNAL ENTRIES 15 2016 2017 2018 2019 2020 2021 16 Construction in progress 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 17 Various accounts 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 18 Accounts receivable 19 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 4,000,000 20 Billing on contracts 1,000,000 1,000,000 5,000,000 5,000,000 4,000,000 4,000,000 21 Cash 22 900,000 900,000 900,000 4,300,000 4,300,000 4,800,000 4,800,000 900,000 4,300,000 4,300,000 4,800,000 4,800,000 A/R 23 24 Construction in progress 25 Construction costs 26 0 0 0 0 0 2,000,000 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 2,250,000 2,000,000 2,000,000 4,750,000 4,750,000 2,250,000 4,250,000 Revenue from long term contract 27 Billings on construction contract 28 Contstruction in progress 20,000,000 20,000,000 29 30 C D E F G H j dicount ammortization schedule date 1/1/2019 30/6/19 31/12/19 30/6/20 31/12/20 cash interest effetive interest increase in balance outstanding balance $1,372,041 $30,000 $41,161 $11,161 $1,383,202 $30,000 $41,496 $11,496 $1,394,698 $30,000 $41,841 $11,841 $1,406,539 $30,000 $42,196 $12,196 $1,418,735 A B 1 principal 1116135 2 interest 255906 3 selling price 1372041 4 4 5 6 book value on 31/12/2020 $1,418,735 7 fair value on 31/12/2020 $1,342,735 8 8 9 JOURNAL ENTRIES 10 1/1/19 11 cash discount on bonds payable 12 bonds payable 13 14 30/6/19 interest expense 15 discount on bonds payable 16 cash 17 31/12/19 18 interest expense 19 discount on bonds payable 20 cash 42,196 1,372,041 127,959 1,500,000 31/12/20 interest expense discount on bonds payable cash FV MV (31/12/2020) unrealised gain 1,342,735 1,418,735 76,000 2,196 30,000 41,161 31/12/20 fair value option unrealised gain 76,000 11,161 30,000 76,000 41,496 11,496 30,000 21 22 41,841 30/6/20 interest expense discount on bonds payable cash 23 11,841 30,000 24 25 26 A A B D E w N 00 1 Date Payment Effective interest rate decrease in balance outstanding balance 2 6/30/2018 3000000 3 6/30/2018 5629071 562907 2437093 4 12/30/2018 5629071 121855 441052 1996041 5 6/30/2019 562907 99802 463105 1532936 6 12/30/2019 562907 76647 486260 10466751 7 6/30/2020 562907 52334 510573 536102 8 12/30/2020 5629071 26805 536102 0 9 3377442 377442 3000000 10 11 JOURNAL ENTRIES 12 30/6/2018 13 leased equipment 3,000,000 lease payable 3,000,000 14 15 30/6/2018 interest expense 0 16 lease payable 562,907 17 cash 562,907 18 30/12/2018 19 interest expense 121,855 20 lease payable 441,052 cash 562,907 21 22 30/6/2019 23 interest expense 99,802 lease payable 463,105 24 cash 562,907 25 30/12/2019 26 interest expense 76,647 27 lease payable 486,260 cash 562,907 28 29 30/6/2020 30 interest expense 52,334 lease payable 31 510,573 cash 562,907 32 33 30/12/2020 interest expense 26,805 34 lease payable 536,102 35 cash 562,907 36 30/12/2020 37 depreciation expense 1,000,000 38 accumulated depreciation 1,000,000 39 An