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in a construction contract that is 10% complete the following information is given as at the end of the first year.
Contract price $ 2,000,000
Cost incurred to date $ 300,000 includes $ 50,000 period specific
Estimated costs to complete $ 1,400,000What figures should be recognised in the statement of profit or loss for revenue recognised and costs recognised?
A:
W1 Rev Reg $2,000,000 * 0.1 = $ 200,000
minus cost incurred general ($300,000-$50,000 + $1,400,000) * 0.1= $165,000
minus cost incurred specific $50,000
total cost recognised = 165,000+50,000=$215000profit reg 200,000-215,000= lost (15,000)
correct answer $200,000 rev and $ 200,000 cost
and no option for $200,000 rev and $215000 cost
may i know why? is that becoz the cost will never should exceed the rev? or sth?No, it’s because you’ve probably missed an integral element of the question that probably indicated that no profit / loss should be recognised until the contract was (say) 25% complete
Is that the answer?
the answer in mcq says 200,000rev and 200,000cost thou
and no statement saying that when is the profit/loss should be recognisedso i am on the right track and should just ignore this right?
Yes, your application of the “rules” was fine. I should maybe revisit the question and introduce the extra line about “profit not recognised until sufficiently advanced to be able to predict with reasonable certainty hate ultimate outcome” (to quote the standard)
ok i got it, the standard says profit not recognised until sufficiently advanced to be able to predict, ie even the progress is 90% and it predict to make a loss, we won’t recognise it still right? and the cost will match the revenue right?
No – if it’s progressed 90% they must surely be able to predict so the loss would be recognised in full
In the example that you gave in your original post a loss was not forecast overall. The reason that the answer is what it is is because 10% completion is not normally “sufficiently advanced to be able to predict with reasonable certainty the ultimate outcome”
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