Question
Lusail Company is constructing administrative buildings. These buildings are constructed according to contracts with reputable and reputable clients. In 2016, Lusail Company started the construction
Lusail Company is constructing administrative buildings. These buildings are constructed according to contracts with reputable and reputable clients. In 2016, Lusail Company started the construction of an administrative building for Al Khor Company. The contract price was $20 million. The costs incurred, costs expected to be completed at the end of each year, invoices issued, and cash receipts during the period of this contract were as follows:
Cash receipts during the year | Invoices issued during the year | Costs expected to be completed at the end of each year | Costs incurred during the year | |
$900,000 | $1,000,000 | $6,000,000 | $2000,000 | 2016 |
900,000 | 1,000,000 | 6,000,000 | 2,000,000 | 2017 |
4,300,000 | 5,000,000 | 1,250,000 | 4,750,000 | 2018 |
4,300,000 | 5,000,000 | 1,500,000 | 4,750,000 | 2019 |
4,800,000 | 4,000,000 | 656,250 | 2,250,000 | 2020 |
4,800,000 | 4,000,000 | 0 | 2,250,000 | 2021 |
In order to implement the above-mentioned construction contract to the fullest, Lusail Company leased a machine from Qatar Leasing Company on June 30, 2018. The lease agreement stipulates that Lusail Company will pay a semi-annual rent amount of $907,652 during the first payment of the rent amount for the lease term, which amounts to 3 years, on June 30 and December 31 of each year, note that the semi-annual maturity starts from June 30, 2018. The borrowing rate of Lusail Company is 10%, which is the same rate used by Qatar Leasing Company when calculating the rent amounts due to it. Depreciation is recorded on a straight-line basis at the end of December of each year. The fair value of the machine is $3 million
In addition to the above, on January 1, 2019, Lusail Company issued bonds worth $1,500,000 for a period of 5 years at an interest rate of 4%. The value of the interest is due on a semi-annual basis on June 30 and December 31 of each year. This is knowing that the market rate of similar bonds is 6%. Lusail Company realizes that according to generally accepted accounting principles in the United States of America, companies can move from the effective interest method to the fair value method of accounting for their obligations with a simplified justification for doing so. On December 31, 2020, the market interest rate increased to 8%, which prompted Lusail Company to switch to the fair value method of accounting for its bonds. On the same date, the company estimated the fair value of its bonds at $735,342.1. Although IFRS allows the use of fair value for accounting for obligations, there are many restrictions and requirements to apply this. Unfortunately, Lusail Company did not meet these requirements, which forced the company to follow the effective interest method when reporting its bonds in the financial statements instead of the fair value method. Required: 1. Briefly explain the main differences between GAAP and IFRS, with a focus on the following accounting treatments: - Revenue recognition before delivery, upon delivery, after delivery - Report on lease contracts - Reporting obligations at fair value 2. Explain and discuss how the previous financial transactions will affect the income statement and the statement of financial position of Lusail Company on December 31, 2016 and December 31, 2020 assuming the company follows the GAAP. S.U and its use of the percentage of completeness method in relation to contracts for the construction of administrative buildings and the fair value method to report on its bonds in the year 2020
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started