Question

Canvas Corp. is a large construction company that reports under IFRS. They have recently signed a contract with Ontario Tech University to build an addition to the library. Canvas began work on the contract at the beginning of 2020. Contract information and estimates are as follows: Contract price ……………………………………………….. $ 2,000,000 Estimated costs Labour.................................................................................. $ 435,000 Materials and subcontracts ................................................. 765,000 Indirect costs........................................................................ 300,000 1,500,000 Estimated gross profit................................................................... $ 500,000 At the end of 2020, the following was the actual status of the contract: Progress Billings to date ......................... $ 1,115,000 Costs incurred to date: Labour.................................................................................. $ 207,000 Materials and subcontracts ................................................. 468,000 Indirect costs........................................................................ 75,000 Latest forecast of total costs of project (no change).................... $ 1,500,000 At the end of 2021, progress billings to date totalled $1,900,000 and costs incurred to date totalled $1,395,000 with a forecast of $155,000 remaining costs to complete. Cash collected was $980,000 during 2020 and $1,000,000 during 2021. Job is expected to be completed in 2022 Instructions a) Calculate the gross profit that would be reported on this contract for 2020 and 2021. b) Prepare all journal entries for 2020. c) Indicate the account(s) and the amount(s) that would be shown on Canvas’ statement of d) Assume all the same facts, except that the forecast of remaining costs in 2021 is not $155,000, but $555,000. How much income (loss) would Canvas then report for the year 2021? e) Assume you are a shareholder of Canvas Corp. Do you think that recognizing revenue over time rather than at a point in time makes the financial statements more useful? Explain your answer.

Answer 1

Contract Price		2000000
Less: Estimated Cost
Labour		435000
Material & subcontracts	765000
Indirect Cost	300000	-1500000
Total Gross Profit		500000
End of 2020
Progress Billing to Date	1115000
Cost Incurred to date
Labour		207000
Material & subcontracts	468000
Indirect Cost	75000	-750000
No change in forcast
Cost incurred to date	750000
Cost still to be incurred	750000
			1500000
Degree of completion	750000/1500000*100		50%
Cost method
Contract Revenue		2000000*50%		1000000
Gross Profit in 2020		1000000-750000		250000
End of 2021
Progress Billing to Date	1900000
Cost Incurred to date	1395000
Cost still to be incurred	155000
Total cost			1550000
Degree of completion	1395000/1550000*100		90%
Cost method
Contract Revenue		2000000*90%		1800000
Less Revenue recognised in 2020			-1000000
Contract Revenue in 2021				800000
Contract Cost					1395000
Less Cost recognised in 2020				-750000
Contract Cost in 2021				645000
Gross Profit in 2021					155000

Journal Entries in 2020
01-Jan-20	On date of Agreement		No Entry
31-Dec-20		Labour A/c Dr		207000
		Material & subcontracts A/c Dr	468000
		Indirect Cost A/c Dr		75000
		To Bank				750000
		Being Cost Incurred
31-Dec-20		Debtor A/c Dr		1115000
		To Contract Revenue		1115000
		Being Progress billing done
31-Dec-20		Bank A/c Dr		980000
		To Debtor			980000
		Being Debtor realised
31-Dec-20		Contract A/c Dr		1000000
		To Contract Revenue		1000000
		Being revenue recognised
31-Dec-20		Contract Cost A/c Dr		750000
		To Contract			750000
		Being contract cost recognised

	Contract A/c
To Bank	750000	By Debtor	1115000
To Bal C/d	365000
	1115000		1115000
To Contract Revenue	1000000	By Bal B/d	365000
To Bal c /d	115000	By Contract Cost	750000
	1115000		1115000

FORCAST OF REMAINING COST 555000 instead of 155000
Contract Price			2000000
Contract Cost
Cost Incurred to date	1395000
Changes in cost due to forcast	555000	-1950000
Contract Profit				50000
Contract profit recognised in 2020 before forcast	500000
Contract profit to be reversed in 2021	500000-50000*50%	475000
Contract profit to be recognised in 2021	50000*90%-25000	20000
Net Contract Loss in 2021		(-475000)+20000	-455000
Contract Profit in 2022		50000*10%	5000

Since The contract period is 3 Year

So Contract revenue and contract cost to be recognised over the period of time instead of at a point of time

It reflects the true and fair view of Financial statement as per applicable IFRS

Shareholder will get better financial results and make its decision accordingly