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Chapter
8 /
Construction
COli
tracts (l AS 11)
73
a] The aggre gate amount of cos ts incurred and recognized profits, le ss re cogni zed lo sse s,
to date
b] Advan ces received
c] Retentions
(5) The g ross amount du e from cus tomers for contract work as an asset
(6)
The g ross amount du e to cu st omers for contract work as a liability
11.2
The gros s amount du e from cus to mers for contract work is the net amount of costs incurred
plus recogni zed profits, less the sum of recognized losse s and progre ss billing s for contracts in
pro gress for which costs incurred plus recogn ized pro fit s, less recognized losses ex ceeds progress
b illings.
11.3
The g ross amount du e to cus to mers for contract work is th e net amount of costs incurred plus
recognized profits, less the sum of recognized losse s and progress billing s for contracts in progress
for which progress billings exc eed incurred plus recogn ized profit s, le ss recogni zed losse s .
Case
Study 4
Facts
In year
I ,
Slow Build Inc. was invited to tender for the construction of a resident ial block and connec ted
shopping arcade with common plaza and garden and play areas. Tenders were required to detail the cos ts
of each element separately, but it was clear that only one contractor would win the entire contract due to
the interre lated aspec ts of the development.
Durin g year
I ,
Slow Build Inc. management traveled to the United States to visit three possible des igners
in order to obtain their preliminary design proposals, of which only one would be selected. The cost of
the visit was $20 ,000 . Later in year I, having selected one designer, Slow Build Inc. retu rned to the
United States to clarify design details and request construction of a scale model in order to make a pre–
sentation of the tender to the ultimate customer. The cost of the seco nd trip was $ IS,OOO.
During year
2,
but before its year
I
financial statements were authorized for issue, Slow Build Inc. was
notified that it had been awarded the contract. However, the contract was not signed until after the year
I
financial statements were issued .
The co ntract was for a total price of $ 16 million, comprising $9 million for the residenti al block , $S mil–
lion for the shopping arcade, and $2 million for the common plaza, garden, and play area . A mobiliza–
tion advance of $ 1 million would be paid at the outset, $ 1 million was payable at the end of year 2, $S
million at the end of year 3, and $8 million was payable at the end of year 4, at which point the devel–
opment would be complete and
$ 1
million was to be held back as a retention for one year.
Slow Build Inc. initially estimated that the total cost of the project wou ld be $12 million, of which $7
million would be for the residential block, $4 million for the shopping arcade , and $ 1 million for the
plaza, gardens , and play area. Included in this cost is $ 1 million of plant acquired specific ally for the
project that could not be used subsequently. The estimated residual val ue of this plant at the end of the
cont ract was $ 100,000. Also includ ed in the ove rall cost was 30 months of depr eciat ion on general plant
and equ ipment already owned by Slow Build Inc. at
$SO ,OOO
per month. Th e on-site accounts staff cost
included in the estimate was
$S,OOO
per month. Their role was to maintain and record time cards of
workers and receive and issue materials.
Costs incurred at each year-e nd were
Residential block
Shopping arcade
Plaza, gardens,
&
play area
Total
Year 2
$1,000,000
500,000
$1,500,000
Year
3
$3,000,000
1.800,000
200000
$5,000,000
Year
4
$3,000,000
1,700,000
800000
$5,500,000
Total
$7,000,000
4,000,000
1000 000
$ 12,000,000
The cost s at the end of year 2 include
$2S0,000
of materials delivered to the site for use in year 3.
The $200,000 in year 3 for the plaza, gardens, and play area was an advance to subcontractors who
would mobilize in year 4.
Durin g year 3, due to a fire at the neighboring plot, the police co rdoned off the whole area for a month
while investigations were conducted. During this time all plant and equ ipment remained idle on site.
However, work continued in Slow Build Inc.' s workshop and yard.
During year 3, the customer requested a variation in the contract with a value of $ 1 million and a cost of
$7S0,000.
However, the variation was not approved by the customer until after Slow Build Inc.' s yea r 3