Data Co Enters into a Two-Year Contract with a Customer

question 2

Multiple Choice

Data Co enters into a two-year contract with a customer to build a data centre in exchange for consideration of €1m. Data Co incurs incremental costs to obtain the contract and costs to fulfil the contract that are recognised as assets and amortised over the expected period of benefit.
The economy subsequently deteriorates, and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms.
The remaining amount of consideration to which Data Co expects to be entitled is €650,000. The carrying value of the asset recognised for contract costs is €600,000. An expected cost of €150,000 would be required to complete the data centre.
How should Data Co account for the asset after the contract modification?

• A) Data Co should recognise an impairment loss of C100,000.
• B) Data Co should record the contract asset for €1m.
• C) The carrying value of the asset recognised for contract cost should be €500,000 (€650,000 less €150,000).
• D) Data Co should recognise an impairment loss of €150,000.

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Definitions:

Current Assets

Short-term financial resources that a company expects to turn into cash within one year.

Financial Statements

Formal records of the financial activities and condition of a business, including the balance sheet, income statement, and cash flow statement.

Long-term Assets

Assets that are expected to provide economic value beyond one year, such as property, plant, and equipment.

Current Liabilities

Financial obligations a company is required to pay within one fiscal year or its operating cycle, whichever is longer.