Problem 3 An entity entered into a construction contract to

Problem 3

An entity entered into a construction contract to build a condo building at a fixed price of $54,000,000. Construction started in 20x0 and ended in 20x3. Data on the contract is as follows (in ‘000’s):

20x0 20x1 20x2 20x3

Costs incurred during the year $ 6500 19500 25000 5800

Estimated costs to complete 38500 26000 6500 -

Billings 18000 18000 - 18000

For each of the parts below, prepare the ‘mini’ income statement for the project for each year and calculate the net investment of the project that will be shown on the balance sheet at the end of each year.

a. The entity uses an input based approach to calculating the percentage of completion.

b. The entity uses an output based approach to calculating the percentage of completion and has calculated the percentages of completion as follows: 20x0:16% | 20x1: 60% | 20x2: 90% | 20x3: 100%

Solution

A) Percentage completion method 2010 2011 2012 2013 Cost incurred in till previous year 0 6500 26000 51000 ADD Cost incurred during the year 6500 19500 25000 5800 Total cost incurred till date 6500 26000 51000 56800 ADD Estimated cost to be incurred 38500 26000 6500 0 Total estimated cost to be incurred 45000 52000 57500 56800 Percentage of completion (A) 14% 50.00% 89% 100% (cost incurred till date /total estimated cost ) Total revenue (B) 54000 54000 54000 54000 Total revenue recognized (A *B) 7800 27000 47896 54000 Less Revenue recognized in previous year 0 7800 27000 47896 revenue recognized in current year 7800 19200 20896 6104 2010 2011 2012 2013 Revenue 7800 19200 20896 6104 Less Cost incurred 6500 19500 25000 5800 Gross profit 1300 -300 -4104 304 b) Percentage completion method 2010 2011 2012 2013 Cost incurred in till previous year 0 6500 26000 51000 ADD Cost incurred during the year 6500 19500 25000 5800 Total cost incurred till date 6500 26000 51000 56800 ADD Estimated cost to be incurred 38500 26000 6500 0 Total estimated cost to be incurred 45000 52000 57500 56800 Percentage of completion (A) 16% 60.00% 90% 100% (cost incurred till date /total estimated cost ) Total revenue (B) 54000 54000 54000 54000 Total revenue recognized (A *B) 8640 32400 48600 54000 Less Revenue recognized in previous year 0 8640 32400 48600 revenue recognized in current year 8640 23760 16200 5400 2010 2011 2012 2013 Revenue 8640 23760 16200 5400 Less Cost incurred 6500 19500 25000 5800 Gross profit 2140 4260 -8800 -400