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QUESTION – TYU 8 [KAPLAN TEXTBOOK Pg. no 244]
Merryview specialises in long-term contracts. In each contract Merryview is entitled to receive payments reflecting the progress of the work, so revenue should be recognised over time.Merryview specialises in long-term contracts. In each contract Merryview is entitled to receive payments reflecting the progress of the work, so revenue should be recognised over time.
Commencement date : 1 July 20X0 [000]
Contract costs:
Architects’ and surveyors’ fees = 500
Materials = 2,800
Direct labour costs = 3,500
Overheads are apportioned at 40% of direct labour costs
Estimated cost to complete (excluding depreciation – see below) 14,800Plant and machinery used exclusively on the contract cost $3,600,000 on 1 July 20X0. At the end of the contract it is expected to be transferred to a different contract at a value of $600,000. Depreciation is to be based on a time-apportioned basis. Better Homes made a
progress payment of $12,800,000 to Merryview on 31 March 20X1. At 31 March 20X2 the details for the construction contract have been summarised as:Contract costs to date (i.e. since the start of the contract) excluding all depreciation = 24,000,000
Estimated cost to complete (excluding depreciation) 6,600,000A further progress payment of $16,200,000 was received from Better Homes on 31 March 20X2. Merryview accounts for profit on its construction contracts using the input method, measured using the percentage of the cost to date compared to the total estimated contract
cost.Required:
Prepare extracts from the financial statements of Merryview reflecting the impact of the contract with Better Homes for:
(i) the year to 31 March 20X1
(ii) the year to 31 March 20X2.SOLUTION [as per textbook]
depreciation calculation for overall profitability [as per textbook]
31 March 20X1 = ($3 million/30 months × 9 months) i.e. 1 July 20X0 to 31 March 20X1.
31 March 20X2 = ($3m/30 months × 21 months).My question is: shouldn’t we consider 12 months in the second year’s calculation? Why are we considering the entire contract period i.e. 21 months?
I apologize if my doubt seems trivial, but I would greatly appreciate any explanation to help me understand better.
Ha! Well done on figuring it out, you are definitely not dumb. Hope the rest of the studies go well.
Thanks
Good day sir. I’m quite lost with this question and have various trivial doubts, your help could let me sleep.
DOUBT 1: why did we add the depreciation in the cost incurred not in the statement of profit or loss.
DOUBT 2: For the year 31 March 20X2 ((40,000×75%) –14,000) are we deducting the 14000 because it was already covered in the previous year.
DOUBT 2: Statement of financial position why did we cumulate the revenue for the year 20X2.
Thank you, sir.It’s a crazy question so don’t get too hung up on it.
DOUBT 1: The depreciation is included as part of the calculations of profit to date, and when the profit is recognised the depreciation will be expensed when recognising the overall costs.
DOUBT 2: The 75% of 40,000 is the total profit (cumulative profit) since the start of the contract, so to look at the amount to recognise this year we will need to deduct what has been recognised in the previous year(s). It would be the same for the cumulative revenue and the revenue to be recognised for this year.
Thanks
Thank you so much for addressing all of my doubts in a timely manner and providing clear explanations. I am thrilled to share that I passed my FR exams with a score of 63!
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