June 2011 Question 5 (Working 2 & 3)

Nnoush2410y ago

Dear Sir, Kindly explain how we get answers stated below 24/48 month (W2) & 15/48 month (W3) ii) Estimated profit: $’000 Contract price 12,500 Plant depreciation (8,000 x 24/48 months) (4,000) Other costs (5,500) ––––––– Profit 3,000 ––––––– (iii) Contract costs incurred: Plant depreciation (8,000 x 15/48 months) 2,500 Other costs 4,800 –––––– 7,300 ––––––

MMikeLittleTutor10y ago#1

It's all here in this paragraph from the question! "Plant for use on the contract was purchased on 1 January 2010 (three months into the contract as it was not required at the start) at a cost of $8 million. The plant has a four-year life and after two years, when the contract is complete, it will be transferred to another contract at its carrying amount. Annual depreciation is calculated using the straight-line method (assuming a nil residual value) and charged to the contract on a monthly basis at 1/12 of the annual charge." We're working out figures for the year ended 31 March, 2011 so the plant will have been used for 15 months by that date The plant has a 4 year life so for the date 31 March, 2011 it will have been in use for 15 months out of that 4 year life - and that's where 15/48 comes from The contract is scheduled to be completed on 31 December, 2011 by which date the plant will have been used (since 1 January 2010) for exactly 2 years or 24/48 out of its useful life of 4 years OK now?