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Wiley IFRS: Practical Implementation Guide and Workbook
I\IULTIPLE·CHOICE QUESTIONS
1. Lazy Builders Inc. has incurred the following
contract costs in the first year on a two-year fixed
price contract for $4.0 million to construct a bridge:
• Material cost
=
$2 million
Other contract costs (including site labor cos ts)
=
$ 1 million
Cost to comp lete
=
$2 million
How much profit or loss should Lazy Inc. recognize
in the first year of the three-year construction con–
tract?
(a) Loss of $0.5 million prorated over two
years.
(b) Loss of $1.0 million (expensed immedi–
ately).
(c) No profit or loss in the first year and defer–
ring it to second year.
(d) Since 60% is the percentage of completion,
recognize 60% of loss (i.e.• $0.6 million).
Answer : (b)
2. Brill iant Inc. is constructing a skysc raper in the
heart of town and has signed a fixed price two-year
contract for $21.0 million with the local authorities.
It
has incurred the followi ng cost relating to the contract
by the end of first year:
Material cost
=
$5 million
• Labor cost
=
$2 million
Construction overhead
=
$2 million
• Marketing costs
=
$0.5 million
• Depreciation of idle plant and equipment
=
$0.5 million
At the end of the first year. it has estimated cost to
complete the contract
=
$9 million.
What profit or loss from the contract should Brilliant
Inc. recognize at the end of the first year?
(a) $ 1.5 million (9/ 18 x 3.0)
(b) $1.0 million (9/ 18 x 2.0)
(c) $1.05 million (10/19 x 2.0)
(d) $1.28 million (9.5/18.5 x 2.5)
Answer : (a)
3.
Mediocre Inc. has entered into a very profitable
fixed price contract for constructing a high-rise
building over a period of three years.
It
incurs the
following costs relating to the contract during the first
year:
• Cost of material
=
$2.5 million
Site labor costs
=
$2.0 million
Agreed administrative costs as per contract to
be reimbursed by the customer
=
$ 1 million
Depreciation of the plant used for the construc–
tion
=
$0.5 million
• Marketing costs for selling apartments when
they are ready
=
$ 1.0 million
Tota l estimated cost of the projec t
=
$ I8 million
The percentage of comp letion of this contract at the
yea r-end is
(a)
50%
(=
6.0/18.0)
(b) 27%
(=
4.5/16.5)
(c)
25%
(=
4.5/18.0)
(d) 39%
(=
7.0/ 18)
Answe r : (a )
4. A construction company
IS
In
the middle of a
two-year construction contract when it receives a
letter from the custome r extendi ng the contract by a
year and requiring the construction company to in–
crease its output in proportion of the number of years
of the new contract to the previous contract period.
This is allowed in recognizing additional revenue
according to lAS I I if
(a) Nego tiations have reached an advanced
stage and it is probable that the customer
will accept the claim.
(b) The contract is sufficiently advanced and it
is probable that the specified performan ce
standards will be exceeded or met.
(c) It is probable that the customer will approve
the variation and the amount of revenue
arising from the variation. and the amount of
revenue can be reliably measured.
(d) It is probable that the customer will approve
the variation and the amount of revenue
arising from the variation. whether the
amount of revenue can be reliably measured
or not.
Answer : (c)
S. A construction compa ny signed a contract to
build a theater over a period of two years, and with
this contract also signed a maintenance contract for
five years. Both the contracts are negotiated as a sin–
gle package and are close ly interrelated to each other.
The two contracts should be
(a) Combined and treated as a single contrac t.
(b) Segmented and considered two separate
contracts.
(c) Recognized under the completed contracted
method.
(d) Treated differently-the building contract
under the completed contract method and
maintenance contract under the percentage
of completion method.
Answer : (a)