Question

King Ltd enters into a fixed price contract for $18 000 000 to build a train station for Hunter Ltd. It will take 3 years to build the station. The project is expected to be completed by the end of 2020. King Ltd’s estimate of contract costs is $16 000 000 at the commencement of construction. However, the expected costs to complete a construction project can change throughout the project. The following data relates to the project: 2018 2019 2020 Progress billing to date 4 000 000 12 000 000 18 000 000 Cash collection to date 3 500 000 11 500 000 18 000 000 Costs for the year 4 000 000 8 500 000 4 000 000 Costs incurred to date 4 000 000 12 500 000 16 500 000 Estimated costs to complete 12 000 000 4 000 000 — What is the gross profit to be recognised by King Ltd at the end of 2019? a. 500 000 b. 636 363 c. 1 136 363 d. 1 015 152

Answer 1

			2018	2019	2020
	Revenue for the year		4,500,000	9,136,364	4,363,636
	Costs incurred during the year		4,000,000	8,500,000	4,000,000
	Gross profit/ (loss)		500,000	636,364	363,636
	Costs incurred during the year		4,000,000	8,500,000	4,000,000
	Costs incurred in prior years		-	4,000,000	12,500,000
A	Total costs icurred		4,000,000	12,500,000	16,500,000
	Total costs:
	Costs incurred in prior years		-	4,000,000	12,500,000
	costs incurred during the year		4,000,000	8,500,000	4,000,000
	estimated cost to complete		12,000,000	4,000,000	-
B	Total contract costs		16,000,000	16,500,000	16,500,000
C=A/B *100	Percentage of completion		25.00%	75.76%	100.00%
D	Contract amount		18,000,000	18,000,000	18,000,000
E=C*D	Revenue earned		4,500,000	13,636,364	18,000,000
	Less: revenue recognised in earlier years		-	4,500,000	13,636,364
	Revenue for the year		4,500,000	9,136,363.64	4,363,636

Revenut for 2019 = 9,136,363.64

Expenses for 2019 = $8,500,000

Gross profit = 9,136,363.64 - $8,500,000 = $636,363

Answer is b. 636 363

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