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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!
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?
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.
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)..
can any one explain how we got 750 in statement of comprehensive income in eg 5 ch13 plz
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
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!
Excellent Mariyln! This requires some practise ……………its very easy to forget.
CAN any one explain how we got 750 in year 2 in statement of comprehensive income eg 5 ch 13 plz
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?
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.
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 ?
In Example 5 working 2 (W2) why using $140 loss in year 2 instead of the $160 from income statement (w1)??
@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.
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%?
@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
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.
@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
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???
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
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”
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
what about the additional costs for the constructor 150,000 ?
Maybe Specific to date costs 190,000-40,000 = 150,000
@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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