March/June 2016 Sample question

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November 17, 2016 at 4:01 pm #349609
gabbi08
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Dear Mike

Please help to understand why the cost to date of 15M has not been included to arrive to the profit?

The contract asset is comprised of contract costs incurred at 31 March 2016 of $15M less payment of $10M from the customer. The agreed transaction price for the total contract is $30M and the total expected costs are $24M. Downing Co uses an input method based on costs incurred to date relative to the total expected costs to determine the progress towards completion of its contracts.

Solution

62.5% complete (15/24*100) therefore the profit of the year is 3.75 (6000*62.5%)
18.75million is recognized as revenue (15.000+3.750) and 15000 as cost of sale.

The contract asset is 8.75 (18.750-10.000)

My understanding is

Revenue
Less
Cost to date
estimated cost
=
Profit

% might be apply to calculate the profit recognized.

I really appreciate your help.

Gabbi
November 17, 2016 at 4:59 pm #349629
MikeLittle
Keymaster
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This is one of those examples where the examiner tells you the profit and therefore you work out the revenue from that profit figure

Instead of approaching it as Revenue – Cost of Sales = Profit, this time we know that profit is 62.5% (percentage complete) of total profit on the contract (62.5% x $6,000 ($30,000 – $24,000) = $3,750)

And we know that costs to date are $15,000

Therefore Revenue becomes the balancing figure

Gabbi, you need to be a bit flexible when reading questions. they will not all be worded in exactly the same way

As we say in England (and probably in Ireland too) there’s more than one way to skin a cat

And there’s more than one way for the examiner to test you

And there’s more than one way to arrive at a profit figure when considering contract accounting

Is that ok for you?
November 21, 2016 at 2:13 pm #350330
gabbi08
- Topics: 135
- Replies: 181
Dear Mike,

Thanks and Regards

Gabbi
November 21, 2016 at 3:57 pm #350379
MikeLittle
Keymaster
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You’re welcome
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