Question

Bohr Co is a construction company and has entered into a contract with a fixed price of £600,000 during the year ended 30^thNovember 20X8.  Bohr Co measures percentage completion using the work certified as a proportion of contract value.

The following information relates to the contract:

	£
Costs incurred to date	360,000
Estimate of the costs to complete the contract	125,000
Value of work certified by independent architect	450,000
Amounts invoiced to client	250,000

Requirement

1. Prepare the relevant Statement of profit or loss and Statement of financial position extracts in respect of the above contract for the year ended 30^thNovember 20X8.       

2. Before the financial statements are finalised, technical problems on the contract mean that costs to complete are reassessed to £275,000. Prepare the amended Statement of profit or loss extract for the year ended 30^thNovember 20X8. A Statement of financial position is notrequired.                                                                                                    

3. Explain the different approaches in a) and b).

Answer 1

Solution a

Percentage completion = Work Certified / Contract Value * 100 = 450000/ 600000*100=75 %

Proportionate costs = Total Cost * Percentage completion = (360000+125000)*75% = 363750

Statement of profit or loss

Particulars	Amount	Particulars	Amount
Project cost incurred	360000	Project Revenue	450000
Project cost yet to incurr	3750
Profit	86250
	450000		450000

Statement of Financial Position

Particular	Amount	Particulars	Amount
Capital (Profit)	86250	Debtor
Due to customer	363750	- Billed	250000
		- Unbilled	200000
Total	450000	Total	450000

Solution b

Percentage completion = Work Certified / Contract Value * 100 = 450000/ 600000*100=75 %

Total Cost = 360000+275000 = 635000

Contract price = 600000

Total Forseeable loss to be recognised as expense = 635000 - 600000 = 35000

Proportionate costs = Total Cost * Percentage completion = (360000+275000-35000#)*75% = 363750

# excluding loss recognised immediately

Statement of profit or loss

Particulars	Amount	Particulars	Amount
Project cost incurred	360000	Project Revenue	450000
Project cost yet to incurr	90000
Forseeable loss	35000	Loss	35000
	485000		485000

Solution c

Approach in solution a: Proportionate project costs are recorded

Approach in solution b: Since project cost is exceeding project revenue, the forseeable loss is recognised immediately as expense. And the remaining project cost is apportioned proportionately based on percentage completion.