Question

Problem 3

An entity entered into a construction contract to build a condo building at a fixed price of $54,000,000. Construction started in 20x0 and ended in 20x3. Data on the contract is as follows (in ‘000’s):

20x0 20x1 20x2 20x3

Costs incurred during the year $ 6500 19500 25000 5800

Estimated costs to complete 38500 26000 6500 -

Billings 18000 18000 - 18000

For each of the parts below, prepare the ‘mini’ income statement for the project for each year and calculate the net investment of the project that will be shown on the balance sheet at the end of each year.

a. The entity uses an input based approach to calculating the percentage of completion.

b. The entity uses an output based approach to calculating the percentage of completion and has calculated the percentages of completion as follows: 20x0:16% | 20x1: 60% | 20x2: 90% | 20x3: 100%

Answer 1

A)
	Percentage completion method	2010	2011	2012	2013
	Cost incurred in till previous year	0	6500	26000	51000
ADD	Cost incurred during the year	6500	19500	25000	5800
	Total cost incurred till date	6500	26000	51000	56800
ADD	Estimated cost to be incurred	38500	26000	6500	0
	Total estimated cost to be incurred	45000	52000	57500	56800
	Percentage of completion (A)	14%	50.00%	89%	100%
	(cost incurred till date /total estimated cost )
	Total revenue (B)	54000	54000	54000	54000
	Total revenue recognized (A *B)	7800	27000	47896	54000
Less	Revenue recognized in previous year	0	7800	27000	47896
	revenue recognized in current year	7800	19200	20896	6104
		2010	2011	2012	2013
	Revenue	7800	19200	20896	6104
Less	Cost incurred	6500	19500	25000	5800
	Gross profit	1300	-300	-4104	304
b)
	Percentage completion method	2010	2011	2012	2013
	Cost incurred in till previous year	0	6500	26000	51000
ADD	Cost incurred during the year	6500	19500	25000	5800
	Total cost incurred till date	6500	26000	51000	56800
ADD	Estimated cost to be incurred	38500	26000	6500	0
	Total estimated cost to be incurred	45000	52000	57500	56800
	Percentage of completion (A)	16%	60.00%	90%	100%
	(cost incurred till date /total estimated cost )
	Total revenue (B)	54000	54000	54000	54000
	Total revenue recognized (A *B)	8640	32400	48600	54000
Less	Revenue recognized in previous year	0	8640	32400	48600
	revenue recognized in current year	8640	23760	16200	5400
		2010	2011	2012	2013
	Revenue	8640	23760	16200	5400
Less	Cost incurred	6500	19500	25000	5800
	Gross profit	2140	4260	-8800	-400