Question

Ovitoto Concrete Investment Cc presented you with the following information for the contracts awarded in Sept 2017;
Contract
Okahandja Road
Midgard Road
Contract Price
1 499 500
1 950 550
Work certified
1 249 500
1 550 550
Cost of work certified
1 199 500
1 400 550
Cost of uncertified work
999 500
1 210 550
Cash received
1 149 500
1 400 550
Total expected cost (including costs incurred)
1 299 500
1 850 550
The percentage of completion method (based on costs) is used to calculate profit on contracts, but only once contracts are 30% or completed or more.
REQUIRED:
2.1 Discuss the difference between the Work Certified Method and the Percentage of C0mpletion method. (6)
2.2 Calculate the profit/loss that can be brought into account for the financial period under review for each of the contracts in the records of Ovitoto Concrete Investment Cc. (19)

Answer 1

2.1 :---Each business is required to choose an accounting method to report income and expenses. It is important to fully understand the chosen method, as each differs, especially concerning taxes. Once selected, the method cannot be changed without special permission from the Internal Revenue Service. The percentage-of-completion and completed contract methods are often seen in construction companies, engineering firms and other businesses that operate on long-term contracts for large projects. Since income and expenses are often deferred during work on these long-term projects, companies seek to defer tax liabilities as well. Both the percentage-of-completion and completed contract methods allow for such tax deferral.

The completed contract method of accounting considers all income and expenses directly related to a long-term contract as received when work is completed. The date of completion is spelled out in the contract and is often months or even years away from the date work begins. Though a construction company may enjoy a break from income taxes during the working phase, and sometimes may even qualify for certain tax incentives in the meantime, this can be a riskier way to account for operations. For example, if a contract is set for completion in five years, the business may not incur taxes on that project's income during that time, but tax laws can and do change from year to year. If, perhaps, tax rates were increased during that period of five years, the company faces paying higher taxes than it would have if reporting occurred sooner in the process. Furthermore, if a business seeks outside investors, it can be challenging to prove to them the value of the company during times of little-to-no incoming revenues. The completed contract method, however, is still the most conservative accounting method for companies working on long-term contracts.