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- June 20, 2018 at 4:34 pm #459484
Hello Chris!
Need your help to tackle a kaplan question
1.”A machine constructed for another customer for a contracted price of $36,000. This has recently been completed at a cost of $33,600. It has now been discovered that in order to meet certain health and safety regulations modifications at an extra cost of $8,400 will be required. The customer has agreed to meet half of the extra cost.”
-The answer is $31,800.( 36,000 – 50% of 8,400)
-Kindly explain the logic of the calculation?Thanks in advance.
June 21, 2018 at 9:06 am #459574Hi,
The contract price is $36,000, which is therefore the revenue to be recognised on completion.
However as the modifications have incurred extra costs of which the customer has agreed to meet half of them, we cannot charge them for this and will have to remove them from the initially agreed contract price.
Hope that helps.
Thanks
June 21, 2018 at 9:29 am #459587Thanks for the reply.
“as the modifications have incurred extra costs of which the customer has agreed to meet half of them, we cannot charge them for this and will have to remove them from the initially agreed contract price.”
1.Why do we need to deduct $4,200 from the contract price?
-We’ve incurred costs of $33,600 and in addition to that we have incurred extra costs of $4,200. Therefore in total, we’ve incurred $37,800 costs.
Now we have machine which cost us $37,800 and has NRV of $36,000 and the lower of these 2 is $36,000. Therefore inventory should be valued at $36,000.2. Kindly locate where I am getting things wrong?
Thanks in advance.
June 21, 2018 at 8:34 pm #459658Hi,
Can you please explain what the bit inverted commas is in relation to please and where you get it from?
I’m a bit confused with what the original question was too sorry and why you’re bringing in IAS 2 Inventory. Is the question not to do with the revenue to be recognised or am I missing something here?
Thanks
June 22, 2018 at 7:24 am #459683Below is the full question.
Neville has only two items of inventory on hand at its reporting date.
Item 1 – Materials costing $24,000 bought for processing and assembly for a customer under a ‘one off’ order which is expected to produce a high profit margin. Since buying this material, the cost price has fallen to $20,000.
Item 2 – A machine constructed for another customer for a contracted price of $36,000. This has recently been completed at a cost of $33,600. It has now been discovered that in order to meet certain health and safety regulations modifications at an extra cost of $8,400 will be required. The customer has agreed to meet half of the extra cost.
What should be the total value of these two items of inventory in the statement of financial position?
1. The bin in the inverted commas is actually from your previous reply in this post.
2. My issue is that why do we need to deduct $4200 from the contract price and not add it to the costs already incurred, that is, $33,600?
Thanks in advance.
June 22, 2018 at 9:24 am #459691Hi,
The $31,800 is the NRV (36,000 – (1/2 x 8,400), which is lower than the cost (33,600 + (1/2 x 8,400) and so is the value of the inventory.
Thanks
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