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  1. Profile photo of sheha says

    Hi Sir,
    I can understand the logic of comparing cummulative revenue to recognise in SOCI for an accounting year for contracts more than a year. But I couldnt understand the recognition of cost. I understand that cost incurred for a year specifically must be fully recognised. However, I couldnt understand the part about general cost. Revenue figure used is the comparison for 2 consecutive years and the same goes for the cost right? But it doesnt make sense to compare the estimated cost for completion for year 1 with the cost in year 2. Could you please explain using the example 5 in the course notes?

    • Profile photo of MikeLittle says

      The cost in year 2 is also estimated cost to complete. It’s the same calculation for all years. As for estimation, the whole exercise is an estimation game. Estimated stage of completion and estimated cost to complete. Both amounts are fundamental to the accounting treatment.

      But an estimate is better than saying “no revenue because we are not able to estimate stage reached” or “let’s only recognize costs to date because all the rest are estimates of future costs”

      I don’t really understand your point about “it doesn’t make sense to compare estimated cost for completion in year 1with the cost in year 2″

      Can you clarify your question for me please?

      • Profile photo of sheha says

        Well… I basically can’t understand the answers for example 5 for the SOCI part. How to arrive to the figures in the costs recognised? I didnt have problems with year 1.

      • Profile photo of MikeLittle says

        Ah! Is this the example where a loss is forecast at the end of year 2? I believe that it is! Where a contract is forecast to be loss making, we calculate revenue in the normal way and put the figure in the top line of working one, forecast the overall loss and put that figure for forecast loss in the bottom line of working one, then complete working one by putting in the figure for expenses that, when deducted from the top line will give you the figure in the bottom line.

        Then compare that year 2 cumulative expense amount with the expense amount from year 1 and the difference is expenses recognised

        Is that better?

      • Profile photo of sheha says

        That’s better! I missed out seeing the loss forecast in year 2. Having understood that part, my ultimate question is, how do i forecast the lost in year 2 for the compared cumulative working? Perhaps I should tell you how i did my working.
        Year 2
        General cost (500 – 300+600 – 500 ) x (65%- 35%) 105
        Period cost 40
        —–
        145
        But then there’s no loss to forecast when i compare it with the revenue 1M x (65% – 35%).

        And then for year 3, my cost recognised was
        General cost 800 x 100% – 65% 280
        Period 190
        —–
        470
        And then revenue will be 1M x 35% + 200.

      • Profile photo of MikeLittle says

        Don’t do the multiplication of 65 – 35!

        Have you looked at the 5 column answer at the back of the notes?

        Work out the 65% position and then deduct the 35% column from the 65% column

        Try that and, if it’s still not hitting home, post again

      • Profile photo of MikeLittle says

        Have you added together the costs to date and the estimated cost to complete? And then compared that total with the contract value?

    • Profile photo of sheha says

      Good day Sir! I just wanted to apologise for the extremely long thread (plus this one). I ld like to let you know that I have finally understood your explanations. Not that it took me 3 months but i just took a break from this chapter and went back here with a clearer mind. Wish me luck!

  2. avatar says

    Hi Mike,

    Can you explain the (a) accounting treatment & the (b) impact on the % of completion of the project for:
    (1) Contract variation (ie Addition of a retractable roof of a project)
    (2) Error costs made by (2.a) the sub-contractor (ie engineer) or by the (2.b) contractor

    Hoping for your response.

    Thanks,

    Hazel

    • Profile photo of MikeLittle says

      For something as substantial as a retractable roof variation ….. at what stage of the main contract was the roof variation agreed? In practical terms I can only imagine that such a variation would result in “start again”!

      It must surely affect the engineering of the walls of the sub-structure (a stadium?)

      IF it doesn’t have that affect on the main contract but can simply be added on, then the original contract value is increased and the percentage completed calculation will be correspondingly affected

      Re error costs – if it’s an error by the engineer – I can only hope that he has good insurance. An error by a structural engineer would tend to have major financial implications. I’m thinking of recent disasters – a supermarket in Latvia, a bridge in Brazil, numerous buildings in China

      Errors by the contractor – it seems to me when I read about this type of disaster that the contractor and the engineer both very quickly leave the scene and are never heard of again – basically, they run away!

      However, on the assumption that they don’t run away, the engineer will be covered by insurance and the contractor, if solvent, will have to pay any additional costs himself

      Does that answer it?

    • Profile photo of MikeLittle says

      Amount invoiced is ……. the amount invoiced! In other words it is the amount of money received plus any outstanding invoices sent.

      The difference between “amounts due from customers” in working 2 and “amounts due from customers” in working 3 is the nature of the customers’ obligation.

      In working 2, the amount is by nature “unbilled work in progress” whereas in working 3 the amount is by nature an account receivable

      Ok?

    • Profile photo of acuteacca says

      @tiamaria, dear first take the third lecture of this chapter then attempt past exams or revision kit if you have difficulties then compare it with your written lecture and if further guidance required then compare with answers of questions if
      more guidance required then reply to my comment and i will solve your problem!!

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