Question

Jordan is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of Jordan’s contracts has an agreed price of $250 million and estimated total costs of $200 million.

The cumulative progress of this contract is:

Year ended:                               30 September 2011            30 September 2012

                                                          $million                                 $million

Costs incurred                                      80                                         145

Work certified and billed                     75                                         160

Billings received                                  70                                         150

Based on the above, Jordan prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

Statement of Profit and Loss

                                                         $million

Revenue (balance)                              100

Cost of sales                                       (80)

                                                           ––––

Profit (50 x 80/200)                            20

                                                           ––––

Statement of financial position

                                                          $million

Current assets

Amounts due from customers

Contract costs to date                           80

Profit recognised                                  20

                                                             ––––

                                                              100

Progress billings                                  (75)

                                                              ––––

                                                                25

                                                              ––––

Contract receivables      (75 – 70)            5

Jordan has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of Jordan’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

1. Assuming Jordan changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts to the above for the year ended 30 September 2012

Answer 1

WN:-1Calculation of Percentage of Completion(Based on New Accounting Estimates):-

Work Certified=$160 million

Contract Price=$250 million

This is 64% (160/250*100)

Statement of Profit and Loss:-(For the year 2012)

Particulars	$million
Revenue(Balance)=250*64%=160-100(Already recognised in 2011)	60
Cost of Sales=200*64%=128-80(Already recognised in 2011)	48
Profit	12

Statement of Financial Position:-For the year 2012)

Particulars	$million
Current Liabilities Amount Due From Customers Contract Cost to date(145-80)(A) Profit Recognised(B)	65 12
(A+B)	77
Progree Billing	(85)
Amount due to customers	8

Contract Recivables(85-80)=$5million

Note 1:-All the above data of one year(year ended 2012) and not cummulative for both years.cumulative data is given in question we do segregation of each and present for only year ended 2012.That is data already recognised in 2011 is segregate and net amount is recognised.

Note 2:-Change in Accounting Estimate:-It is change in acounting treatment done in past.Assuming Changes only affect the current year and future years.Prior years don not change based on the new estimate.A prior period adjustment must be used to change prior periods.