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Hi all …
Regarding example 5 under construction contracts I dont get how we worked out year 2 and 3. How did we get the $510 cost and -$160 profit? Which numbers will recognized in the I/S the 510 or the the 790 cost? why is the cost to date $540 in year 2? why did we take a 990 cost to date for year 3 and not just the $ 800 as per question?
I need ur help please!For the amounts due from working 2 and 3 >> should we sum the two amounts when including it in the SFP?
Thanks in advance 😀
Hi
For working 1, the Statement of Income working, we need to deduct the cumulative figures for year 2 from the cumulative figures for year 3 to arrive at the SofI figures for year 3. Similarly, deduct year 1 cumulatives from year 2 cumulatives to arrive at the year 2 SofI figures.
Year 2 working 1 is tricky! As at the end of year 2, a loss is predicted over the whole contract. Therefore we need to recognise this loss in full as at the end of year 2. Therefore, the second figure to put into Working 1 in year 2 is the total loss anticipated on the contract and the balancing figure in working 1 Year 2 is therefore the costs to be recognised.
Now, compare year 1 with year 2 cumulative and you arrive at the figures for the year 2 financial statements
Workings 2 and 3 are SofFP workings and are NOT cumulative – they are as at a moment in time.
In addition, the figures at the end of workings 2 and 3 could be both debits, both credits or one of each. Furthermore, they are by their nature dissimilar assets ( or liabilities ). Working 2 is effectively “unbilled work in progress” whereas working 3 is “accounts receivable”
If it were me in the exam room, I would show them separately. Having said that, Steve Scott rarely gives you the information to calculate working 3.
OK?
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