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On 1 January 2015 Amir entered into a contract with a customer to construct a stadium for consideration of $100m. The contract was expected to take 2 years to complete.
At 31 December 2015 Amir had incurred costs of $24m. Costs to complete are estimated at $20m. In addition to these costs, Amir purchased plant to be used on the contract at a cost of $16m. This plant was purchased on 1 January 2015 and will have no residual value at the end of the 2 year contract. Depreciation on the plant is to be allocated on a straight line basis across the contract.
Amir measures progress on contracts using an output method, based on the value of work certified to date.
At 31 December 2015, the value of the work certified was $45 million, and the customer had paid $11.4m.
Required: How should this transaction be accounted for in the year ended 31 December 2015?Hi,
I’m not here to just answer a question outright for you. You need to attempt it first and then once you’ve shown me what you’ve done, I’ll explain where you’ve gone wrong. Doing it this way is far better for your learning.
I look forward to your answer so that I can help you out.
Thanks
Progress: 45/100 = 9/20
Statement of proft/loss
revenue (9/20*100) = 45
cost (9/20*44 (total cost)) = 19.8
less: depreciation (16/2) = 8
profit= 17.2mStatement of financial position
cost to date= 24
profit= 17.2
less: amount billed= 11.4
contract asset = 29.8mHi,
I think that you’ve tried to short cut it a bit too much.
Firstly, work out the total profit, which I think is $18 million (100 – 24 – 20 – 16) and then look at the stage of completion at 45%. You can then work out the revenue and depreciation (as above) and the costs as a balancing figure.
Thanks
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