Question

In: Accounting

Jordan is a construction contract company involved in building commercial properties. Its current policy for determining...

Jordan is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.
One of Jordan’s contracts has an agreed price of $250 million and estimated total costs of $200 million.

The cumulative progress of this contract is:
Year ended: 30 September 2011 30 September 2012
$million $million
Costs incurred 80 145
Work certified and billed 75 160
Billings received 70 150

Based on the above, Jordan prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

Statement of Profit and Loss
$million
Revenue (balance) 100
Cost of sales (80)
––––
Profit (50 x 80/200) 20
––––
Statement of financial position
$million
Current assets
Amounts due from customers
Contract costs to date 80
Profit recognised 20
––––
100
Progress billings (75)
––––
25
––––
Contract receivables (75 – 70) 5

Jordan has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of Jordan’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.
Required:
(i)   Assuming Jordan changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts to the above for the year ended 30 September 2012 (5marks)

(ii)   Explain the Criteria for Recognising Revenue from contract with customers. .

(iii)   Explain the difference between Revenue Recognition from construction contracts when The contract is profit making and when losses are probable.

Solutions

Expert Solution

i)Estimation of % of achievement Program (Based on New Accounting Estimates):

I) Work Accredited: $160 million

Contract Value: $250 million

% of Achievement= (160/250*100)=64%

Accompanying is the Report of Profit including Loss for the year 2012

Particular $ million
Revenue (250*64%) $160
Small: Previously identified in 2011 2011 $100
Balance ( A) $60
Value of Selling(200*64%) $128
Small: Previously identified in 2011 2011 $80
Balance  ( B) $48
Profit(A -B) $12

Accompanying is the report of Financial Position for the year 2012:

Particular $ million
CURRENT LIABILITIES
cash due from clients(145-80) $65
Contract Cost to date A $12
Profit Realised $77
Progressing Billing B $(85)
cash due from clients(A -B) $8
Contract Received (85-80) $5

Change in Accounting Estimates is the difference in Accounting in the present year as fine as in coming years. This should be regarded that Earlier years do not get exchanged due to Change in Accounting Estimates

ii)The guidelines for identifying revenue of a contract with clients are as below:

The presentation of IFRS 15 clarifies that an article identifies revenue by utilizing the accompanying 5 ways:

Task 1- Recognize the contract with clients

Task 2- Recognize the execution obligation with clients

Task 3- Prepare the purchase price

Task 4- Designate the purchase price to the performance responsibility in the contract

Task 5- Identify the Revenue when the Article provides the Execution obligation

iii)Differentiation within Revenue Recognition during from construction contract is profit-making also at losses are feasible:

Revenue Recognition when from construction contract is profit making Revenue Recognition when losses are probable:
Wherever result of the contract do can be calculated probably and the complete revenue exceeds the total value(this is profit) later it should be realized instantly in the Income Statement based on Conclusion of Contract which is also perceived as % of Completion Design If a loss is required from a construction contract, this complete loss is identified quickly in the income record.This is an application of PRUDENCE CONCEPT while predicted losses are realized instantly.

Related Solutions

Jordan is a construction contract company involved in building commercial properties. Its current policy for determining...
Jordan is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract. One of Jordan’s contracts has an agreed price of $250 million and estimated total costs of $200 million. The cumulative progress of this contract is: Year ended:                               30 September 2011            30 September 2012                                                           $million                                 $million Costs incurred                                     ...
Raider Red Construction entered into a contract to build a commercial building for $3,600,000. Raider Red...
Raider Red Construction entered into a contract to build a commercial building for $3,600,000. Raider Red Construction uses the percentage-of-completion method for recognizing revenue on the project. Construction began in September of 2018 and the building was completed in June of 2020. The company provided the following additional information on the project. 2018 2019 2020 Costs incurred to date $                 725,000 $              2,100,000 $              3,400,000 Estimated costs to complete $              2,175,000 $              1,400,000 $                             -   Billings during the year $                ...
Stone Age Construction Pte Ltd entered into a construction contract to build a commercial building for Bintang Ltd for $9,200,000.
Stone Age Construction Pte Ltd entered into a construction contract to build a commercial building for Bintang Ltd for $9,200,000. Construction commenced on 1 January 2021. The following details relate to the construction project as at 31 December 2021:                                                   S'000Progress billing to-date             5,520Cash receipt to-date                  5,120Costs incurred to-date               4,032Estimated total costs                  6,400Stone Age Construction Pte Ltd accounted for the contract using the percentage-of-completion method.Required:(a) For the year ended 2021, calculate the percentage of completion to-date, revenue recognised for the year...
Continent Construction Company is a building contractor specializing in small commercial buildings. The company has the...
Continent Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Continent does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with...
Rooney Construction Company is a building contractor specializing in small commercial buildings. The company has the...
Rooney Construction Company is a building contractor specializing in small commercial buildings. The company has the opportunity to accept one of two jobs; it cannot accept both because they must be performed at the same time and Rooney does not have the necessary labor force for both jobs. Indeed, it will be necessary to hire a new supervisor if either job is accepted. Furthermore, additional insurance will be required if either job is accepted. The revenue and costs associated with...
Rookie Construction Limited (RCL) entered into a contract to construct a building for $975,000. The contract...
Rookie Construction Limited (RCL) entered into a contract to construct a building for $975,000. The contract provided for progress payments. RCL’s accounting year ends December 31. Work began under the contract on August 1, 2019, and was completed on October 31, 2021. RCL uses the percentage-of-completion method to account for this long-term contract. Construction activities are summarized below: 2019 2020 2021 Construction costs incurred to date 180,000 630,000 825,000 Estimated remaining costs to complete 630,000 190,000 0 Progress Billings during...
Brick Ltd is a building construction company. On 1July 2017, Brick Ltd signed a contract with...
Brick Ltd is a building construction company. On 1July 2017, Brick Ltd signed a contract with Pear Ltd to build a factory. The contract price was $ 12,000,000. The relevant information is as follows: Financial year ending 30 June: Construction costs for year Billings and payments for year 2018 $ 3,500,000 $ 3,000,000 2019 $ 5,000,000 $ 5,000,000 2020 $ 1,500,000 $ 4,000,000 Pear Ltd will be in control of the asset throughout the construction process. The contract is completed...
Cussatt Construction Company had a contract starting April 2018, to construct a $48,000,000 building that is...
Cussatt Construction Company had a contract starting April 2018, to construct a $48,000,000 building that is expected to be completed in September 2020, at an estimated cost of $44,000,000. At the end of 2018, the costs to date were $20,240,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $4,800,000 and the cash collected during 2018 was $6,400,000. Cussatt uses the percentage-of-completion method. For the year ended December 31, 2018, Cussatt would recognize...
A construction company entered into a fixed-price contract to build an office building for $28 million....
A construction company entered into a fixed-price contract to build an office building for $28 million. Construction costs incurred during the first year were $8 million and estimated costs to complete at the end of the year were $12 million. During the first year the company billed its customer $10 million, of which $4 million was collected before year-end. What would appear in the year-end balance sheet related to this contract using the percentage-of-completion method? (Enter your answers in whole...
A construction company entered into a fixed-price contract to build an office building for $38 million....
A construction company entered into a fixed-price contract to build an office building for $38 million. Construction costs incurred during the first year were $12 million and estimated costs to complete at the end of the year were $18 million. During the first year the company billed its customer $14 million, of which $7 million was collected before year-end. What would appear in the year-end balance sheet related to this contract using the percentage-of-completion method? (Enter your answers in whole...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT