Pricewell – June 2009

Hi,

Scenario:
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:
$’000
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.

I cannot understand the reasoning behind the depreciation for the acquired plant is worked out.
I only understood that we need to depreciate for 6 months (from 1 Oct 2008 till 31 March 2009). I cannot understand why there is 1/2.

Answer:
Depreciation:
$8,000 x 1/2 x 6/12 = $2,000

Many thanks,

Chri