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On 1 October 2008 Pricewell entered into a contract to construct a bridge over a river. The agreed price of the bridge is £50 million and construction was expected to be completed on 30 September 2010. The £14·3 million in the trial balance is:
materials, labour and overheads 12,000
specialist plant (acquired 1 October 2008) 8,000
payment from customer (5,700)The sales value of the work done at 31 March 2009 has been agreed at £22 million and the estimated cost to complete (excluding plant depreciation) is £10 million. The specialist plant will have no residual value at the end of the contract and should be depreciated on a monthly basis. Pricewell recognises profits on uncompleted
contracts on the percentage of completion basis as determined by the agreed work to date compared to the total contract price.MY solution:
Estimated Profit:
Rev: 50000- total costs (12000+8000+10000+2000dep)
est profit = 18000%completed =44%
statement of P/L: Revenue=22000
COS=14080 and thus profit=7920statement of financial position
costs to date= 22000(12+8+2dep)+7920-5700=24220 (contract asset)
this answer is different from that in the solution. They have no taken the depreciation in costs to date.
could you please explain a bit on this?
thanks 🙂
You can’t take 2,000 depreciation AND the 8,000 cost of the specialised plant
In addition, the plant is to be written off on a straight line basis whereas the other costs of the contract are to be recognised on a completion stage basis
There are two distinct ways of dealing with this problem
The first is to follow the workings set out in the course notes:
W1
Revenue recognised 44% x 50 million 22,000
Costs recognised 44% x (12 + 10) ( 9,680)
Depreciation 6 months ( 2,000)
Profit recognised 10,320W2
Costs to date 12,000
Plant cost to date 2,000
Profit recognised 10,320
Less amounts invoiced ( 5,700)
Amount due from customer 18,620Or …
44% complete for a contract with a 20,000 profit:
Revenue recognised 22,000
Costs recognised (balancing figure) (13,200)
Profit recognised (44% x 20,000) 8,800OK?
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