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Contruction contract

Eedmundchan14y ago
There is a construction contract undertaken by the company near the end of the financial year ended 31/12/2011. The cost incurred up to 31/12/2011 was $30 and an advance payment of $50 was received. As the outcome of the contract cannot be estimated reliably, cost recovery method is adopted, with nil profit recognised. In that case , are the following entries correct:

In Income statement
Revenue 30
Cost incurred 30
_____
Nil

In SOFP
Gross amount due to customer

Cost incurred 30
Add Profit recognised Nil
30

Progess billing (50)
______
20
======
Am I correct in principle ? Would you kindly advise?
MikeLittleMikeLittleTutor14y ago#1
That seems correct to me :)
Nnokia14y ago#2
This might be a lil bit more helpfull:
Practically all these entries are passed in co’s accounts:

When Advance is received:
Cash Dr 50
Advance From customer Cr 50

When Actual Expense is incurred by the co, following entries are passed with the actual amount of expenditure:
WIP Dr 30 (Just would appear in co’s Trial Balance)***
Mat, Cash,etc Cr 30 (Assets Being credited from SOFP)

Recording revenue and exp:
Exp Dr 30 (PnL)
Rev Cr 30 (PnL)

***Now Net of WIP and Advance from Customer Would be shown in Co’s Balance sheet (20 would be shown as Due to customer in SOFP)
MikeLittleMikeLittleTutor14y ago#3
Hi

Not sure I can agree with Nokia's double entries.

I would be inclined to do this:

Dr Cash 50 Cr Receivable 50

Dr Costs 30 Cr Cash 30

At the year end, Dr Receivable 30, Cr Revenue 30

These leave you with 30 revenue less 30 costs = so no profit recognised

Cash has increased by 20 and 20 is owing to the customer
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