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Chapter
8/
Construction Contracts (lA S II )
75
59.57% ($7, 148,000) of the contrac t price is recog nized as reve nue. Therefore, $7, 148,000 less cumula–
tive reven ue to year 2 of $1,265,000, or $5,883,000, is recog nized in year 3.
Note
(0 :
The subcontrac tor advance is dedu cted from the cost, as it is an advance for work to be exe –
cuted in yea r 4.
The percentage complete is based on the contract cos t of $12 million less the expec ted residual value of
the plant specifically acq uired for the contract plus the cos t of var iation. Th is is applied to the initial
contract value of $ 16 million, as the variation is not approved.
Year 4:
In year 4 the contract is complete and the full contrac t revenue of $ 17 mill ion (including the approved
var iation), less revenu e recogni zed in earlier years, is taken to the income statement.
Ove rall, the contract has revenu e of $ 17 million and costs of $ 12.6 15 million , earning a profit of
$4 ,385,000 ($2,0 16,000
+
$2,369,000). The loss in year I arises solely from the initial business trip,
which is not a con tract cost.
BALANCE SHEET
Year I
Year 2
Year 3
Year
4
Cumulative progress billings
$2,000,000 $7,000,000 $ 16,000,000
Variation
1,000,000
Total cumulative billings
2,000,000
7,000,000 17,000,000
Cumulative revenue recognized
$ 15,000
1,265,000
9,531,000 17,000,000
Disclosed as due from customers
15,000
2,53 1,000
Disclosed as due to customers
735,000
Disclosed as debtors (retention)
1,000,000
Contracts in progress
Costs incurred
15,000
1,265,000
7,515,000
nJa
Recognized profits
2,016,000
nJa