If a previously profitable construction contract being accounted for with the percentage-of-completion method is later projected to be unprofitable, then the Net Loss in that period will be equal to:

Select one:

a. All previously recognized Gross Profit on the contract

b. The projected Net Loss on the entire contract

c. All previously recognized Gross Profit plus the percentage of completion times the projected Net Loss on the entire contract

d. All previously recognized Gross Profit on the contract plus the projected Net Loss on the entire contract

e. The projected Net Loss on the entire contract times the percentage of completion.

Solutions

Expert Solution

Answer d is correct,

As per Para 36 of IAS 11 says that "When it is probable that total contract costs will exceed total contract revenue, the expected loss shall be recognised as an expense immediately."

Thus in accordance with Paragraph 36 of IAS 11 Construction Contract The expected loss i.e. The projected Net Loss on the entire contract shall be recognised as an expense immediately. Hence the Net Loss in that period will be The projected Net Loss on the entire contract.

As contract become unprofitable lateron hence we need to reverse the all previously recognized Gross Profit also.

By summing up we get that All previously recognized Gross Profit on the contract plus the projected Net Loss on the entire contract will be the Net Loss in that period.

Answer a is incorrect because we also need to follow paragraph 36 as mentioned above and

Answer b is incorrect because it does not take account of reversal of all previously recognized Gross Profit.

Answer c is incorrect because rather than percentage of completion times the projected Net Loss on the entire contract, as per Paragraph 36 we need to recognize whole expenses.

Answer e is incorrect because it does not take account of reversal of all previously recognized Gross Profit and also rather than percentage of completion times the projected Net Loss on the entire contract, as per Paragraph 36 we need to recognize whole expenses.

ekkarill92 answered 2 years ago

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