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April 8, 2016 at 11:25 pm
Just finished the “Calculation of Construction Contract Profits” lectures and notes, everything makes seems fine but little confused about the double entry for working 2, the first amount due/owed to customer. YOu said show it separately for AR…. which heading and where would you show it?
can you please help?
September 29, 2015 at 5:04 am
Why w1 changed for example 4?
May 26, 2015 at 4:23 pm
If we had expected the loss by forecasting future cost against revenue. In practical, how does this “balancing “cost figure should be shown in statement of profit loss? such as journal etc.
May 26, 2015 at 5:04 pm
Dr Construction Cost in the statement of profit or loss
Cr Construction Contract Account
May 25, 2015 at 1:23 pm
Hi, I cannot find the lecture for Chapter 14- IAS 36. The website takes me to chapter 15 right after chapter 13.
May 25, 2015 at 3:27 pm
Why have you posted this twice? There really is no need 🙁
If you want a reply from me, then post on the ask the tutor page
If you want a reply from the general populace, then post in the general forum
But, please, do not post in both places
May 25, 2015 at 4:36 pm
I’m sorry 🙂 I wasn’t sure where I’ll get the answer from.
May 25, 2015 at 5:05 pm
You’ll always get an answer if you post on Ask the Tutor
You may never get an answer if you post on the general forum – most do, but there’s no guarantee
May 11, 2015 at 9:12 pm
Many thanks for your help, Mike! At long last I understand how to answer questions on construction contracts 🙂
May 11, 2015 at 9:21 pm
May 3, 2015 at 11:25 pm
I don’t understand why in example, cost is (300 000 + 250 000) * 65%= 357 500
I dont understand why is 375 000 instead.
May 3, 2015 at 11:31 pm
ok got it
May 1, 2016 at 9:10 pm
Had the same concern! Total cost for contract (estimated) 300+250>500 (revenue). So we already now that there is a loss of 50K.
Therefore (375) is a balancing figure.
April 30, 2015 at 11:05 am
Good morning Sir,
i am really struggling to understand how you got to your figures within Exampe 5… Mainly the costs in year two of £750,000. Am i missing something?
Many thanks, Chris.
April 30, 2015 at 5:49 pm
Yes, you certainly are missing something but, before I answer you, I want to raise two points:
1 – this really would be better addressed to me on the ask the tutor page because I rarely look at the recent post section
2 – have you looked at previous comments under this lecture?
Please look at previous posts and, if you’re still stuck, post again
April 8, 2016 at 11:26 pm
April 9, 2016 at 2:16 pm
“show it separately for AR” – that says it all!
November 26, 2014 at 3:12 am
dear Sir, What are the ways of calculating the stage of completion?
October 1, 2014 at 8:35 am
Dear Sir, Thanks for the excellent lectures. I was wondering why in example 5, for the costs recognised in year one you did not remove period specific cost of 40000 from general cost of 300000 before calculating the percentage of cost incurred that is 30% x (300000-40000+500000). I might not have understood the concept well but I think that is what you did in example 3.
October 1, 2014 at 8:44 am
In example 3 it says specifically that the $750,000 INCLUDES the $200,000 period specific
In example 5 the general costs are described as “general costs to date” and on the line above the period specific are clearly separate from those general costs.
It’s all a matter of reading the question very carefully!
October 1, 2014 at 9:51 am
You are right! is a matter of reading the question very carefully.
October 1, 2014 at 10:24 am
But that’s the same principle for ALL questions in ACCA exams!
October 1, 2014 at 6:15 pm
Thanks for the reply.As you said is a matter of reading the question very carefully. Thanks once more for the very enriching lectures, I would also take this opportunity to thank You and Mr John Mofat for my success in CBE F2 and F3 in early september 2014. I relied solely on your lectures and revisions and i did not get any revision kit and i still scored 62 and 56 respectively. Thanks once more for the great opportunity you are giving students to pass the ACCA EXAMS.
October 1, 2014 at 8:35 pm
Thanks for F2 and F3 should be directed at John – I’ll pass on your thanks. But remember, it was you in that exam room!
August 23, 2014 at 5:39 pm
There is this cost thing in the construction contract:
Omega has an insurance policy to protect it against claims arising on its construction contracts. The directors estimate that a monthly premium of $50,000 can reasonably be allocated to this contract, together with general administrative overheads of $40,000 per month.
So, my doubt is: Do we always take the insurance cost (if its attributed to the contract)
and what about the general admin OH? The solution has not added it with other construction costs..? Any specific reason is there?
August 23, 2014 at 9:14 pm
From the wording of your question, those general administrative overheads would have been incurred anyway, whether or not we were working on a contract.
Only those costs directly attributable should be involved in calculating revenue, costs and therefore profits on the contract
August 24, 2014 at 8:29 am
Okay, thank you Sir.
August 24, 2014 at 12:31 pm
August 22, 2014 at 7:27 pm
Here is a Dec -2008 question of Construction contract (Dipifr)
On 1 October 2007 Delta began a substantial construction project for a customer. The fixed contract price was $60 million and the estimated duration of the contract was two years. On that date they purchased plant for $15 million and materials for $10 million, both amounts being for exclusive use on the contract. They debited both amounts to the contract account that appears in the trial balance. They also used employees at a monthly cost of $500,000 throughout the 12 month period beginning on 1 October 2007. These employee costs are included in production costs in the trial balance.
On 1 October 2008 Delta purchased additional materials for exclusive use on the contract at a cost of $10 million. They expect to require employees to work on the contract at a monthly cost of $400,000 for the 12 month period to 30 September 2009 but these are the only additional costs they expect to incur in future on this contract. The plant and equipment purchased for use on the contract is expected to have no residual value on 30 September
2009. The directors of Delta considered that the contract was 50% complete at 30 September 2008.
Could you please have a look if the following solution is correct?
Step1: Checking if the entire contract is profitable or loss-making:
Total contract price = 60 mn
Less: Total contract costs (15+10+6+10+4.8) = 45.8 mn
Total expected Profit = 60-45.8 = 14.2 (Hence, its a profit making contract)
Step2: P/L working:
Revenue recognize= 50% of 60 = 30
period specific costs = (500000*12)= 6
general costs= 50% [(15+10)+(10+4.8)]= 19.9
=> Attributable profits= 30- (6+19.9) = 4.1
Please let me know where have I gone wrong ?
August 22, 2014 at 7:43 pm
Why do you think that you have gone wrong?
August 23, 2014 at 4:11 pm
I am not sure about the ‘cost’ part. In Solutions, it says:
Total expected costs:
And, then 50% of 45.8 = 22.9 is recognised as cost of sales. But, in your lecture, it was told that we take 100% of the period specific cost.
Can you please explain it?
August 23, 2014 at 4:36 pm
The materials cost is not period specific ie although it was incurred specifically in that first year, it didn’t need to be – it’s just part of the overall material cost
A period specific cost is one that is incurred and that relates specifically to that particular period. Material costs are rarely specifically related to a specific period – they are merely the material costs of the entire contract.
August 23, 2014 at 4:41 pm
Thank you Sir. I understand that material cost is not period specific.
But what about the employee salary for that period (5,00,000 *12 months = 6mn) Wouldn’t this be considered as the period specific?
And, why plant cost is included? Don’t we just take the depreciation of plant (for 1 yr) in the costs to be recognised in P/L?
August 23, 2014 at 4:58 pm
The plant has a two year life, it was bought on day 1 of the contract and dies on the completion of the contract. OK, just take the depreciation – it works out the same (because the plant was bought on day 1!)
No (employee salaries) again, like materials, employees’ wages are simply a cost of the contract. If there had had to be some remedial work and the employees had had to work specifically on repairing the previous work, that would have been period specific.
I’m going to generalise here (and I’ve never said this before (so I could be wrong!)) “a period specific cost is a cost that was not anticipated at the time the contract was started / signed but has been incurred because of some unforeseen event / circumstance”
Now, I’ve not thought that through thoroughly, but as an initial thought, it’s not bad
August 23, 2014 at 5:05 pm
Thanks a lot..
So, in the costs, we always take the depreciation (for that period)
Why employee salary is not ‘period specific’, I have understood.
In short, I have understood it!
Also, you earlier asked me if I have cleared F7 or not. Actually, its my first international exam and its DipIfr. I have not given any ACCA exam prior to this.
I read your F7 & P2 lectures for preparing Dipifr.
August 23, 2014 at 5:09 pm
Ah, ok! It probably would have been easier if you had been an ACCA student that had already passed F7. But, no problem. It’s still there available for you to pass
August 22, 2014 at 7:26 pm
March 25, 2014 at 12:08 pm
SO I’m lost over here. How exactly was the cost recognized (Genera) calculated in question 5?
Thanks in advance
April 28, 2014 at 2:44 pm
yr1: costs to date : 300,000 +Est’d costs: 500,000 = 800,000
800,000 x 30% = 240,000
yr2: we estimated a loss =1,000,000 – (600,000+500,000) = (100,000)
plus the specific periode (40,000) we’ll have a (140,000)
spec cost (40,000)
gen costs ( since we estimated a loss then this will be the balancing figure)
610,000 – x = -140,000
loss recognised (140,000)
I hope this is clear lol xD
January 20, 2014 at 10:36 am
Hi’ now i stuck in kit questions regarding ias 11
any one here who help me on skype?
January 20, 2014 at 10:06 am
specific cost of 40.0000 occur in both first two years, but why u can’t accont it while preparing year 2 profit nd loss
January 20, 2014 at 12:17 pm
40,000 does NOT occur in both years! I had that problem to. The column your looking at where 40,000 appears is a cumulative column and coz 40,000 was recognised in the first year you cant recognise again in the second. I think thats right
January 20, 2014 at 1:38 pm
That’s right Biggles.
rcc002 – do you see the amount of 190,000? That’s also cumulative – it’s 40,000 from year 1, zero from year 2 and 150,000 from year 3
so recognition os period specifics is 40,000 in year 1, and 150,000 in year 3 giving a total of period specifics of 190,000
September 27, 2013 at 12:22 am
Hi Mike, Thanks for the lecture.
However, would you advise on the right procedure because BPP apportions both revenue rec and costs rec using the %ge completion when there is Recognised loss- and any balancing figure they call it “expected loss”, unlike the approach in this example where costs would not need to be apportioned using the %ge compl. method when a loss is recognised.
Reference Question, Qn50, Books of Contract, 2012 Rev Kit, pg53. Thanks in advance!
May 12, 2013 at 6:32 am
It’s said losses expected should be recorded even if contract hasn’t bugun.
But why would anyone even need to go that far, like … a commercial entity embarking on a loss venture?? Why?
May 12, 2013 at 6:33 am
May 12, 2013 at 6:55 am
Maybe the seller wants “to receive” this buyer by performing current contract for low price and hoping that in future buyer will bring more profits in another contracts.
May 12, 2013 at 6:58 am
Or maybe next situation. Contract is signed with profit, but lately something changed (for example seller’s equipment damaged) and new expenses occur (seller know exactly that to start works under this contract he need to purchase new equipment or repair old) and seller can’t avoid performing contract (maybe penalties will much more higher than expected losses)..
April 21, 2013 at 12:25 pm
can any one explain how we got 750 in statement of comprehensive income in eg 5 ch13 plz
September 9, 2013 at 3:34 pm
Its a balancing figure. If u forsee a loss ( [ total cost of 500+600+40] > contract value 1000) u have to immediately recognize it. So 1140 -1000 is a 140 loss. Revenue of 650 was recognized, so in order to get the 140 loss. ( 650-40-750) = 140
Hope this helps
September 9, 2013 at 8:01 pm
Thanks Marilyn – it could be a bit late – the original question was posted in April so presumably Fida has already taken the exam. I just hope that they (he or she) passed! 🙂
September 26, 2013 at 11:34 pm
Excellent Mariyln! This requires some practise ……………its very easy to forget.
April 21, 2013 at 12:22 pm
CAN any one explain how we got 750 in year 2 in statement of comprehensive income eg 5 ch 13 plz
April 9, 2013 at 5:51 pm
Good day Mike,
I need clarification. In the event of a loss, the total loss is recognised immediately. In example 4, the Cost recognised was the balancing figure whereas the Revenue recognised was worked out based on the percentage completed.
An example in Kaplan instead gave the Revenue recognised as the balancing figure and worked out the Cost recognised with the percentage completed.
Are they accepted alternative ways of treating this situation?
April 12, 2013 at 8:38 am
The answer to the issue I raised is in the technical article on construction contracts in the Sept-Nov 2008 edition of the Student Accountant.
April 9, 2013 at 10:37 am
Hi Mike! Could you explain the presentation in the SFP when we have both amounts due to customers and from customers? Do we demonstrate separate lines in current assets and liabilities or we present one line depending on the total difference ?
December 28, 2012 at 3:28 pm
In Example 5 working 2 (W2) why using $140 loss in year 2 instead of the $160 from income statement (w1)??
December 28, 2012 at 4:10 pm
@1992825amaar, The 140 loss is the figure to be recognised by THE END of year 2. But we have already recognised 20 profit in year 1. So, in order that 140 loss should be recognised by the end of year 2, we need to recognise 160 loss in year 2 to give us 140 cumulative by end year 2.
November 1, 2012 at 9:38 pm
in year 1 we calculated the costs (300+500) by 30% stage of completion. Why did we not do the same in year 2, multiply the costs (600+500) by 65%?
November 2, 2012 at 6:31 am
@chenchen, Because a loss is forecast and that loss should be recognised in full in the year in which it is forecast.
Therefore, we can determine the revenue figure ( 65% x 1 million ) and we know the forecast loss by simple calculation. Therefore the costs to be recognised becomes the missing figure
October 5, 2012 at 10:49 pm
In example 5 page 75-how is the 510,000 in general cost shown in the year 2 income statement calculated….somehow I am not following that bit.
October 6, 2012 at 11:22 am
@kimcap28, Because, in the situation where an overall loss is forecast, the loss must be recognised in full in the year you realise that a loss will be suffered.
In order to recognise the loss in full, the bottom line of working 1 must be completed immediately after the first line. So, now we have a figure for revenue and a figure for loss recognised. The missing figure of 510,000 is therefore the value of the costs to be recognised
October 5, 2012 at 8:21 am
Hi Mike…the 50 which is yet to be billed, is an asset to be included in the SOFP…..current asset! Can you confirm please???
October 5, 2012 at 11:18 am
Yes, that is correct. I suppose possibly it COULD be a deferred asset to be invoiced after, say, 2 years – if that’s what the contract says. But, when I wrote the question, it was intended that it was a current asset
June 3, 2012 at 2:56 pm
Good example, however I still don’t have complete understanding why unbilled amounts and A/R has the same name ” Amounts due from/to customers” 🙂
May 19, 2012 at 10:02 pm
i understand and could apply this in a 11/2hr by the way am home studying with f7 so this is my only source of help and you guys are doing a great job
April 19, 2012 at 12:13 pm
what about the additional costs for the constructor 150,000 ?
April 22, 2012 at 3:20 pm
Maybe Specific to date costs 190,000-40,000 = 150,000
May 10, 2012 at 11:52 pm
@mdadil, Well that ‘150,000’ was as a matter of fact, added to the question and hence the increase in cumulative total of period specific cost in year 3 to ‘190,000’.
It seems confusing reading the text (below) as if it’s a separate cost, but actually it has already been settled in the chart above.
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