Question

In: Accounting

Alfa Ltd. enters into a 3 years contract, the costs and profit/loss details of which are:...

Alfa Ltd. enters into a 3 years contract, the costs and profit/loss details of which are:


Contract price $30 m

Estimated costs $21 m (when the contract was signed)

Estimated profit: $9 m


Details of the actual costs and estimated costs to complete the contract are:


Year ended 31 March

Year 1

($000)

Year 2

($000)

Year 3 ($000)

Construction costs in the year

2 940

16 635

12 000

Costs to date

2 940

19 575

31 575

Estimated costs to complete

18 060

12 000

--

Estimated total costs (costs to date + costs to complete)

21 000

31 575

31 575


Notes:

- At the end of year 1 the project is still profitable and profit can be recognised.

- At the end of year 2 the project’s total costs exceed the contract price. There will be an overall loss on the contract which must be recognised in year 2.


Required:

Prepare the general ledger for ‘construction in process/progress (CIP)’ account.

Solutions

Expert Solution

General Ledger
Construction in process/progress (CIP)
Date Description Debit Credit Balance
Mar 31, Year 1 Cost incurred (Debited) $    2,940 $    2,940
Mar 31, Year 1 Gross profit (debited) $    1,260 $    4,200
Mar 31, Year 2 Cost incurred (Debited) $ 16,635 $ 20,835
Mar 31, Year 2 Gross loss (credited) $    3,810 $ 17,025
Mar 31, Year 3 Cost incurred (Debited) $ 12,000 $ 29,025
Mar 31, Year 3 Gross profit (debited) $        975 $ 30,000
Mar 31, Year 3 Project completed $ 30,000 $             0

Calculation

Year Year 1 Year 2 Year 3
Cost incurred during the year $              2,940 $                16,635 $              12,000
Cumulative cost incurred at end of year $              2,940 $                19,575 $              31,575
Cumulative cost incurred at end of year $              2,940 $                19,575 $              31,575
Add: Estimated costs to complete as of year-end $            18,060 $                12,000 $                         0
Total estimated cost $            21,000 $                31,575 $              31,575

Percentage of completion

(cumulative cost incurred at end of year / Total estimated cost)

14.00% 62.00% 100.00%
Revenue recognized till the date (30000 * percentage of completion) $              4,200 $                18,600 $              30,000
Less: Revenue recognized up to earlier year $                       0 $                  4,200 $              18,600
Revenue recognized in current year $              4,200 $                14,400 $              11,400
Revenue recognized in current year $              4,200 $                14,400 $              11,400
Less: cost incurred during the year $              2,940 $                16,635 $              12,000
Less: Provision For Loss of Project $                  1,575
Add: Loss settled from Provision $                1,575
Gross Profit (Loss) $              1,260 $                (3,810) $                    975
Your Answer
Year Year 1 Year 2 Year 3
Revenue $              4,200 $                14,400 $              11,400
Gross Profit (Loss) $              1,260 $                (3,810) $                    975
Hint:
Provision For Loss of Project, When Estimated Project cost is more than Contract Price then Difference between them Provision should be made. And for future Amount of provision should be used for write of loss. For Year 2, Provision = estimated cost less Contract revenue = 31575-30000 = 1575

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