In: Accounting
Question 2
Part A
Luxury Living Concepts Corp. (LLC) is a publicly accountable
enterprise that builds large complexes, including schools, office
towers, apartment buildings and shopping centres, on a contract
basis. Additional information with respect to the company is as
follows:
- LLC’s year end is December 31.
- The company uses the cost-to-cost approach to determine the stage of completion of its construction projects.
- The enterprise rounds the percentage of completion to two decimal places (for example, 13.54%).
- A discount rate of 4% adequately reflects the underlying
credit risk of LLC’s customer for this transaction.
In 20X1, LLC entered into a $120 million contract to construct a
shopping mall over a three-year period. Construction of the project
was completed in late 20X3. Total costs were originally estimated
to be $98 million. LLC’s progress on the contract and other
pertinent information is detailed below:
in 000's | 20X1 | 20x2* | 20x3** | Total |
Costs incurred during year | 23,000 | 55,000 | 43,000 | 121,000 |
Cumulative costs incurred to date | 23,000 | 78,000 | 121,000 | |
Estimated costs to complete | 72,000 | 46,000 | 0 | |
Progress Billings during the year | 29,000 | 51,000 | 40,000 | 120,000 |
Collections during the year | 22,000 | 50,000 | 48,000 | 120,000 |
* The revised cost data was not known in 20X1.
** The revised cost data was not known in 20X2.
Required:
a) Prepare the required journal entries to record transactions
relating to the contracts for the 20X1, 20X2 and 20X3 fiscal
periods. Show all supporting calculations for each journal entry.
The calculations are to be referenced or included in the
description of the journal entry.
b) Prepare the excerpts of LLC’s statements of financial position
as at December 31, 20X1, and December 31, 20X2 (exclude the impact
on cash and retained earnings).
Part B
Refer to the facts in Part A. Independent of the requirements in
Part A, assume that the additional cost in 20X2 resulted from
changes to the project requested by the customer in 20X2 and that
the customer agreed to increase the contract price to $140 million.
The additional $20 million was added by LLC to its final progress
billing in 20X3 and was paid by the customer during that
year.
Required:
a) Determine the revenue to be recognized by LLC in each of 20X1,
20X2 and 20X3.
b) Determine the expense to be recognized by LLC in each of 20X1,
20X2 and 20X3.
Show all supporting calculations for requirements a) and b) to be
eligible to receive partial marks.