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Hi Mike,
Contract price $8,000
Costs incurred to date $2,900
Estimated costs to completion $5,200
Value of work certified to date $3,000
Progress billings $3,400An old mineshaft has been discovered under the site and the costs of dealing with this have been taken into account in the calculation of estimated costs to completion. The company’s lawyers are reasonably confident that the customer will have to bear the additional costs which will be incurred in stabilizing the land. If negotiations are successful then the contract price will increase to $10m.
The question did not raise contract price to $10m- but why not, if it’s probable and can be reliably measured?
EDIT: I think the problem lies in “…are reasonably confident that the customer will have to bear the additional costs which….”
Had the sentence been “…are reasonably confident that the customer will have to bear the additional costs and raise the contract price to $10m….” we would have recognized $10m instead of $8m, is that correct?Answer:
Price $8,000
Total costs $8,100
Loss $(100)SOPL:
Revenue $3,000
Cost of sales $3,038
Expected loss $(62)
Loss $(100)SOFP:
Costs incurred to date $2,900
Loss $(100)
Amounts invoiced $(3,400)
Contract liability $600Hoping to hear from you, thank you 🙂
Ok, now give me the name please – I don’t have a BPP study text
The reason I ask is because it sounds to me that there’s some vital piece of information missing from your post
In addition, is this question in the context of contract accounting or is it within the context of contingencies and provisioning?
OK, the name of the company is C co. This question is in the context of contract accounting.
I should have typed the full question out- sorry!
C co is a civil engineering company. It started work on two construction projects during the year ended 31 December 2000. The nature of both contracts is that the customer controls the asset as the project goes forward. Work is certified by a surveyor as performance obligations are completed. The following figures relate to those projects at the end of the reporting period.
Mary hill :
Contract price $9000
Costs incurred to date $1400
Estimated costs to completion $5600
Value of work certified to date $2800
Progress billings $2600Rottenrow:
Contract price $8000
Costs incurred to date $2900
Estimated costs to completion $5200
Value of work certified to date $3000
Progress billings $3400An old mineshaft has been discovered under the site for the rottenrow project and the costs of dealing with this have been taken into account in the calculation of estimated costs to completion. C co lawyers are reasonably confident that the customer will have to bear the additional costs which will be incurred in stabilizing the land. If negotiations are successful then the contract price will increase to $10m.
C co recognizes revenues and profits on construction contracts on the basis of work certified to date.
Calculate the figures which would appear in C co financial statements in respect of these two projects.
Answer:
Mary hill:
SOPL-
Revenue $2,800
Recognized profit $622
Cost of sale $2,178SOFP-
Costs incurred to date $1,400
Recognized profit $622
Amounts invoiced $2,600
Contract liability $578Rottenrow:
SOPL-
Revenue $3,000
Recognized loss $100
Cost of sales $3,100SOFP-
Costs incurred to date $2,900
Recognized loss $100
Amounts invoiced $3,400
Contract liability $600I think that you are correct …
… “C co lawyers are reasonably confident ” does not give sufficient indication of certainty that the customer will be liable and so I believe that it would be wrong to treat the contract as being increased by that $2,000
OK, I certainly hope the exam questions will not include any of such vague sentences! Thanks for your help 🙂
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