Revenue

Hello Chris,

Hope you are doing great!

I have a doubt regarding the inclusion of specialist plant amount in calculating the total profit on contract.
It’s usually the depreciation of the plant included along with the cost to date. But in the answer below, they have included the whole amount of the plant. Can you please clarify this doubt for me?

“On 1 October 20X2 Pricewell entered into a contract to construct a bridge over a river. The total
contract revenue was $50 million and construction is expected to be completed on 30 September 20X4.

Costs to date are:
$m
Materials, labour and overheads 12
Specialist plant acquired 1 October 20X2 8

The sales value of the work done at 31 March 20X3 has been agreed at $22 million and the estimated cost to complete (excluding plant depreciation) is $10 million. The specialist plant will have no residual value at the end of the contract and should be depreciated on a monthly basis. Pricewell recognises satisfaction of
performance obligations on the percentage of completion basis as determined by the agreed work to date compared to the total contract price.

What is the profit to date on the contract at 31 March 20X3?

ANSWER:

$’000
Total contract revenue 50,000
Costs to date (12,000)
Specialist plant (8,000)
Costs to complete (10,000)
Total profit on contract 20,000

Profit to date = $20m × 22 / 50 = $8,800,000

Thank you in advance 🙂