Dyreng Plc. (Dyreng), a Belgianbased construction firm, reported the following information for Year 11. Dyreng applies IFRS and reports in thousands of euros (€).
Year 11
Revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . € 18,957.2
Cost of Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,161.9)
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,795.3
Other Operating Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.9
Selling, General, and Administrative Expense. . .. . . . . . . . . . . . . . . . . . . . (3,929.5)
Other Operating Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36.5)
Year 11
Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . € 937.2
Finance Costs . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (347.2)
Income from Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5
Profit Before Taxes and Discontinued Operations . . . . . . . . . . . . . . . . . . . . . . . 604.5
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (203.7)
Net Profit from Continuing Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400.8
Results of Discontinued Operations (net of tax).... . . . . . . . . . . . . . . . . . . . . . . 23.7
Net Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . € 424.5
Further information available to you reveals the following six items, with all euro amounts reported in thousands.
a. During Year 11 Dyreng signed an agreement with the City of London to build a new terminal at Gatwick airport. The construction will commence in Year 12. As evidence of its commitment to the project, the City of London gave Dyreng a deposit of €80 toward the contract price of €240. Dyreng recognized revenues in Year 11 of €240 on this transaction. Because Dyreng had not yet performed work, it recorded no costs of sales at the time it recognized the revenue.
b. Dyreng recognized revenues of €700 in Year 11 related to a contract signed in Year 10.
It had performed all the work in Year 10, but the customer did not remit payment until Year 11. It recognized the cost of the work performed, €660, as expense when it recognized the revenue.
c. In Year 11 Dyreng consolidated its administrative functions and sold an office building for €560. The carrying value of the building was €600. The firm reported this transaction in revenues and cost of sales, respectively.
d. After preparing its income statement for Year 11, Dyreng realized that €45 of income associated with discontinued operations was included in Other Operating Income.
Ignore tax effects in evaluating this transaction.
e. During Year 11 Dyreng completed a renovation project. The contract price was €450, and the firm expended €230 in materials, labor, and overhead costs. Dyreng sent the bill to the client, but because it did not receive payment in Year 11, the firm did not record this transaction in its income statement for Year 11.
f. In Year 11, a firm offered to pay Dyreng to lease the advertising space on scaffolding that Dyreng was erecting for a renovation project. The client offered Dyreng €960 to lease the advertising space for one year. Dyreng accepted the offer and recorded €960 as a reduction of the cost of sales of the renovation project. At the end of Year 11, six months of the lease remained.
Evaluate the way Dyreng classified each of the six items on its income statement. If you disagree with this classification, state your reasoning and determine the effect on the firm’s gross profit and pretax profit from continuing operations from the alternative classification that you would recommend.