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Hello mike,
There is this Question 5 of June 2011 regarding Construction contracts.it says annual dep. is calculated using straight line and charged to contract on a monthly basis at 1/12 of the annual charge.
plant is used for 3 months in the previous year. and 12 months this year and probably 9 months after the actual year end ( at which we make F/S )
but in solution it has taken cost of full 4000 ( 8000 value and 4 years life )
why full 4000, if its charged at monthly basis that should be 2000 for that year? ( 500 for last year )Hi
Surely that’s not 8000 and 4 year’s life. Is it not 8,000 and 2 years’ life. I don’t have the question in front of me so can you check to make sure you’ve got the facts right and, if I’m wrong with my guess, come back to me again
No, its 4 years life and 8000 cost, although after 2 years it will be moved on carrying value to another Contract..
So, if it were acquired 6 months into the first year, that would be 1,000 cost incurred, 2,000 for the first FULL year, and 1,000 for the last 6 months before it gets moved to the next contract.
What’s the name of the question?
Mocca? no it was acquired 3 months after the contract date (1st oct) on (1st jan), last year end is 31 march so 3 months?
yes … 500; 2,000; and 1,500
I’ll see if I can find the question … but it’s not likely to be today, sorry
Can you look at the question now mike 🙂 thank you for your time, its only 5 days left to exam so i should be ready for construction contract question 🙂
Hi, I’ve re-read your posts. What about this – does it answer your problem? It’s an 8,000 asset, to be used on the contract for 2 years and then moved on to another contract. So we need to depreciate just 4,000 over the two years of work. It was used for 3 months in year 1, to be used for a full year in year 2 and then for 9 months in year 3.
IF that is correct, the respective depreciation charges are 500, 2,000 and 1,500.
When calculating TOTAL costs incurred and to be incurred on the contract (when determining whether it’s a forecast loss) you need to bring in the full 4,000 costs of using the plant as well as all the material and labour costs already incurred and still to be incurred
Is that ok?
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