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Hi Sir, I watched the video you did on construction accounts. It was very good. I am stuck on a question. Please help.
AE has a three year contract which commenced on 1 April 20X4. At 31 March 20X5, AE
had the following balances in its ledger relating to the contract:
$000 $000
Total contract value 60,000
Cost incurred up to 31 March 20X5:
Attributable to work completed 21,000
Inventory purchased for use in 20X5/6 3,000 24,000
Progress payments received 25,000
Other information:
Expected further costs to completion 19,000At 31 March 20X5, the contract was certified as 50% complete
Applying IAS 11 Construction contracts, what is the value of the work in progress and
gross amounts due from customers that will be shown in the statement of financial
position as at 31 March 20X5Work in progress Gross amounts due from customers
A $17,000,000 $30,000
B $ 2,500,000 $ 5,000
C $24,000,000 $25,000
D $21,000,000 $60,000my calculations
So when calculating the gross amount due from customers- we do as per lectures:
Profit (Total Level)= £60,000
Less costs: 24,000+19,000=43,000
profit= 17,000
the contract was certified as 50% complete- 50% of 17,000= 8500SOFP
Cost incurred to date= 24,000
Profit/Loss= 8500
less progress billings= -25,000
total = 7500however this option is not in the answers. the booklet says B is the correct answer and I can not understand why? has it got something to do with the inventory purchased.. should I not have included it somewere in my calculation?
The solution simply does 30,000-25,000=5,000.. it looks like it is doing 50% of the revenue – the progress payments.. this isn’t the way in the lectures.. is it a different method? surely both should get the same answer?
Also how would you calculate the WIP?
thanks
Hi,
Have you got anymore detail from the answer given in your study materials? I’m not too sure I agree with the answer, although there could be more information in the question that I’m missing.
Thanks
Hi sir. yes. below is an extract.
I am using Acron material.. to supplement my BPP questions booklet.
Answer is B $2,500,000
Compare the contract value and total expected costs, including foreseeable losses
$’000Total contract price 60,000
Costs incurred to date (24,000)
Estimated costs to completion (19,000)
Profit 17,000Income statement extracts $’000
Revenue (50% x 60,000) 30,000
Costs of sales (balancing figure) (21,500)
Profit (50% x 17,000) 8,500Statement of financial position balances $’000
Costs incurred to date 24,000
Less transfers costs of sales (step 2) (21,500)
Less foreseeable losses (0)
WIP (current assets) 2,500Gross amounts due from customer (30,000 – 25,000)
=5,000I have not seen a question asking for WIP or a solution calculating gross amount from customers the way acorn material has. I have posted the full question and answers. Hope you can help.
I’m with you in that I’ve never seen anybody split the figures on the SFP, however if you total the two figures in the Acorn answer (2,500 WIP + 5,000 due) then we get the answer that you calculated earlier, and I agree with you too on that calculation.
One way to work it out would be to calculate the 7,500 as you’ve done above and then work out the difference between the revenue to date and progress billings as they’ve done, whihc gives us the 5,000. You can then calculate the WIP as the balancing figure between our 7,500 and the 5,000.
Hope that helps. I genuinely doubt you would be asked to do this split but if you are at least you have a basic way to attempt it.
Thanks
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