con struction contract

Sir,
how to calculate estimated profit and further what to do

Tentacle is involved in the construction of a residential apartment building. It is being accounted for using
the percentage of completion basis in IAS 11 Construction contracts. The recognised profit at 31 March
20X7 was $1·2 million based on costs to date of $3 million as a percentage of the total estimated costs of $6
million. Early in May 20X7 Tentacle was informed that due to very recent industry shortages, building
materials will cost $1·5 million more than the estimate of total cost used in the calculation of the percentage
of completion. Tentacle cannot pass on any additional costs to the customer
how to calculate

State and quantify how items above should be treated when finalising the financial statements of Tentacle
for the year ended 31 March 20X7

IAS 11 requires that the profit on the contract be recalculated to take into account these additional costs.
Profit is based on costs to date as a percentage of total costs. As costs to date are $3m and total costs $6m,
the percentage is currently 50%. This will change when the additional costs are included as follows:
Costs to date Total expected
costs
% Total expected
profit
Profit to date
$m $m $m $m
Original 3 6 50% 2.4 1.20
Additional costs – 1.5 (1.5) –
Amended 3 7.5 40% 0.9 0.36
Recognised profit for the year to 31 March 20X7 should therefore be restated as $360,000. $840,000 (1.2m
– 0.36m) will be written off in the income statement and adjusted in the statement of financial position
against amounts due to/from customers.