TOPIC: ACCOUNTING FOR BUILD OPERATE AND TRANSFER

The terms of the arrangement require the operator to: a. Construct a road-completing construction within two years b. Maintain and operate the road for three years c. Resurface the road at the end of Year 4 d. The government pays the operator P200 per year in Years 3 to 5 for making the road available to the public e. The road is turn-over to the government at the end of Year 5 f. The operators determine that the implied interest rate is 24.42%. 8. The operator finances the arrangement entirely with debt. The debt proceeds are taken as the contract cost are paid. The debt is payable as follows: 75 in each of years 3 and 4 and P40 in year 5. The effective interest rate is 25.77% The operator makes the following estimates: Contract Cost Stand-alone selling price Construction Services Forecast cost +10% Forecast cost +20% Operation Services Forecast cost +30% Road resurfacing Forecast cost +10% Year 1 2 3-5 4 70 80 25 15 Compute for the profit for year 2