Problem 1.

All questions within this problem relate to GoodFellas Inc a construction company.

Extract from the trial balance of GoodFellas at 31. December 2019 (EUR)

	Debit	Credit
Costs of services provided	320,000
Contracts in progress	700,000
Interest expense	21,000
Sales and administrative expenses	120,000
Impairment losses	13,000
Sales revenue		680,000
Interest income		6,000

Required:

GoodFellas entered a lease contract for a digger machine on the 2nd of January 2019. The machine could have been bought outright for 60,000. Under the lease contract GoodFellas paid 10,000 on the 2nd of January 2019, and then will need to pay 20,000 on the 2nd of January 2020, 2013 and 2014. The effective rate implicit in the lease is 9.7%. The lease was at first treated as an operating lease and the first payment was included in expenses (under cost of services provided), but it became clear later that the lease is in fact a finance lease: Explain how this transaction should be treated in the financial statements for the year ended 31. December 2019 without providing the amounts. Calculate the total amount that should be recognised as a liability on the 2nd of January 2019. [3points]

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v. Refer to the transaction described in (iv) above. (A). Calculate the finance charge for the year ended 31. December 2019 (B). Explain the treatment of the transaction (including the amounts) for the following year, that is year ended 31. December 2020. [3points]

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vi. On the 1st of Februrary 2019 GoodFellas entered a 3-year construction contract to build an ice cream factory. The budgeted revenue is 1,200,000 with costs budgeted at 800,000. By 31. December 2019 700,000 of the total contract costs had been incurred and recorded as contract in progress. No revenue has so far been recorded in the accounts. Explain the accounting treatment and calculate the amounts related to the contract that need to be included in the statement of financial position for the year ended 31. December 2019. The client has so far transferred progress payments to the total amount of 500,000. [4points]

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vii. GoodFellas pays corporate income tax at a flat rate of 21% of income before tax. However, income on construction contracts (questions 1g and 1h) is taxed when cash is received from the client. The client has so far paid 500,000 since the start of the contract in February 2019. Explain the treatment of the tax on construction contract revenue. Calculate current tax, the amount of tax liability and deferred tax. . [4points]

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viii. Refer to all the questions above and make appropriate adjustments to the trial balance (excepts i, ii, iii & iv). Prepare the statement of income for the year ended 31. December 2019 on the basis of the trial balance and the questions above. At a minimum write the form of the statement of income with corresponding amounts from the trial balance. [4points]

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