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Can anyone help on the question below I don’t understand how the answer is $1 contract liability. How is the (7.8) transfer to COS worked out?
The contract price was $12 million.
One year later:
Costs to date $6m
Estimated costs to complete $9m
Amounts invoiced $4m
Certified complete 40%How much is the contract assets/liabilities?
$1 million contract liability
$2 million contract liability
$1 million contract asset
$2 million contract assetAnswer
$1 million contract liability
Contract Asset
0.8 from revenue
6 Costs to date
(7.8) transferred to cost of sales to show the full 3 loss on the project as a wholeMany thanks
40% complete gives revenue to recognise of 40% of $12 million = $4.8
Cost recognition WOULD be, if contract were headed for an overall profit, 40% x (Costs to date + costs to complete) = 40% x $15 million = $6 million
But it’s not – it’s headed for an overall loss and that overall loss is $3 million ($12 contract value compared with TOTAL costs of $6 + $9 gives a $3 million forecast loss)
And any forecast loss should be recognised in full as soon as it is forecast that the contract is a loss-maker
So if we’re recognising $4.8 revenue and we need to recognise a $3 loss, cost recognition must be $7.8 million
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