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Hi Mike, I’ve got a little problem here with the treatment of Specialist Plant used in construction contract from Dune (6/10) questions.
There are two issues here:
1. The specialist plant is bought on 1 Oct X0 at $12,000 with a residual value of $3,000. As such the depreciation of the plant to 31 Mar X1 is $3,000 ((12,000-3,000)/18*6), making thecarrying value of the plant as at 31 Mar X1 $9,000 (12,000-3,000)2. The construction contract cost included in the cost of sales to date is $9,600 ($32,000*30%). This cost consists of material, labour and plant depreciation. However, the total cost of materials and labour to date is $8,000 (5,000+3,000) leaving $1,600 (9,600-8,000) to the cost of plant (depreciation).
My question here is that, how should we treat the depreciation of the plant in the statement of financial position and the statement of profit or loss?
How do we get to include the cost of $9,600 as the cost of sales in the statement of profit or loss while at the same time having the specialist plant carrying value of $9,000 in the statement of financial position? This would be imbalance between the credit and debit side. Per one time the plant is expensed at $1,600 in the statement of profit or loss while accumulated depreciation at $3,000. Please help enlighten me. Thank you
The workings for a construction contract are there to be able to calculate the figures for revenue, cost and therefore also profit recognition.
Depreciation on the plant is included as a cost to date and the full value of the plant to be used up is used in the calculation of “total costs for the contract”
Any difference between costs incurred and costs recognised in the statement of profit or loss is included within the calculation showing amounts due from customers
Costs incurred to date is NOT the basis for costs recognised in the PorL. So you are wrong in principle to say that, of the 9,600, we can account for 5,000 + 3,000 materials and labour. The costs recognised amount is not capable of being allocated. All we can say is that, with an overall profit on the contract predicted as 8,000 and the contract being 30% complete, then profit to be recognised for the period is 2,400. revenue to be recognised is 40,000 x 30% = 12,000
So costs to be recognised are 9,600. The surplus of costs incurred to date over the costs recognised figure represent costs incurred, not yet recognised and are taken into account in working W2
OK?
Hi.. may i know if the amount due to customer is the difference between costs incurred and costs recognised in the statement of profit or loss?
“Amount due from customer” is the title given for two separate amounts, both shown in the workings.
The first is effectively “unbilled work in progress” and is calculated as:
Costs incurred to date +
Attributable profits –
Amounts invoicedThe second is otherwise known as “accounts receivable” and is calculated as:
Amounts invoiced –
Amounts receivedOK?
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