Question Tag: Construction Contracts

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  • 30 Marks

PSF – Nov 2023 – L2 – Q1 – Public Sector Financial Statements

Assess expected profit, completion stage, and financial statement recognition for a government contract under IPSAS.

Housing-for-all Corporation is an entity established by Kazua State to engage in building construction. The corporation is partly financed with subvention from the State and also from the proceeds from its operations. It applied for a bid to construct twenty (20) classroom buildings in the riverine area of the state. After all the initial procurement processes on bid-opening were carried out, the corporation won the contract in June 2018. The contract price was N220m. The building construction contract was billed for completion in two years. The company uses stages of completion on the basis of value of work completed. The following financial data were available in respect of the contract as at December 31, 2019:

Description Amount (N’000)
Total contract price 220,000
Total expected costs 180,000
Costs incurred to date 120,000
Value of work certified as complete 140,000
Amount billed to client (Kazua State) 130,000
Progress payment received from client 100,000

The contract was duly completed in June 2020.

Required:

a. Determine the expected profit of the contract, stage of completion in percentage, as well as the amount to be recognized in Housing-for-all Corporation’s income statement at December 31, 2019. (11 Marks)

b. Calculate the amount to be recognized as gross amount due to or from the client, Kazua State, the amount of trade receivable, and prepare extracts of financial statements in respect of the construction contracts at December 31, 2019. (13 Marks)

c. Identify what constitutes the composition of contract costs as contained in IPSAS 11. (6 Marks)

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  • 3 Marks

FR – NOV 2016 – L2 – Q7b – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of IAS 11's methods for determining stage of completion in construction contracts.

Briefly explain TWO methods recognized by IAS 11 which can be used to determine the stage of completion of any contract.

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  • 1 Marks

FA – May 2012 – L1 – SA – Q34 – Regulatory Environment of Accounting

Identifying the process where progress billings for payments exceed the revenue recognized in IAS for construction contracts.

In accordance with International Accounting Standard (IAS) on construction contract, the process where the rate of progress billings for payment is higher than those utilized for revenue recognition is ……………………………..

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  • 12 Marks

FA – Nov 2011 – L1 – SB – Q2c – Regulatory Environment of Accounting

This question asks about the different types of construction contract pricing.

Write short notes on the different types of construction contract pricing

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  • 2 Marks

FA – Nov 2011 – L1 – SB – Q2b – Regulatory Environment of Accounting

This question asks for the definition of construction contracts according to SAS 5.

Define “Construction Contracts” in accordance with SAS 5.

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  • 1 Marks

FA – Nov 2011 – L1 – SB – Q2a – Regulatory Environment of Accounting

This question asks for the SAS relating to construction contracts.

Which Statement of Accounting Standard (SAS) is on Construction Contract?

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  • 15 Marks

FA – Nov 2012 – L1 – SB – Q1 – Financial Statements Preparation

Explain the principles and prepare financial statements based on a construction contract.

Real Construction Company Plc. is a major construction company in Nigeria. It recognizes revenue on construction contracts by reference to the stage of completion of the contract. However, in certain circumstances, revenue is only recognized to the extent that it does not exceed recoverable contract costs.

The company is halfway through a contract to build a new overhead bridge at a contract price of N300 million.

Progress report on this contract as at 1 April 2011 is as follows:

  • Cumulative sales revenue recognized: N150 million
  • Cumulative cost of sales to date: N112 million
  • Profit to date: N38 million

The following information has been extracted from the accounting records as at 31 March 2012:

  • Total progress payment received for work certified as at 29 February 2012: N180 million
  • Total costs incurred to date (excluding rectification costs below): N195 million
  • Rectification costs: N17 million

Real Construction Company Plc. had received progress payments of 90% of the work certified as at 29 February 2012. The company surveyor estimated that the value of the further work to be completed during March 2012 would be N20 million.

At 31 March 2012, the estimated costs of uncompleted contract were put at N45 million.

The rectification costs were the costs incurred in widening the pedestrian access roads to the bridge, due to an error by the company’s architect when making the initial drawings.

The company calculates the percentage of completion of its contracts as the proportion of value earned to date compared to the contract price.

All estimates can be taken as reliable.

Required:

a. Briefly explain the principles underlying each of the two methods of recognizing revenue and describe the circumstances in which their uses are appropriate. (5 Marks)

b. Prepare extracts of the financial statements for the contract for the year ended 31 March 2012. (10 Marks)

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  • 15 Marks

FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)

Prepare the statement of profit or loss and financial position extracts based on the percentage of completion for a building contract over two years.

Akawo Limited is a building contracting firm based in Abuja. ABC Limited awarded a contract to Akawo Limited to construct a residential building in Lagos. The agreed contract price is N80 million, and the completion date is December 31, 2017.

The following are details of transactions on the contract up to March 31, 2016:

  • Contract commenced on July 1, 2015
  • Contract costs incurred by March 31, 2016, include:
    • Architects and surveyor’s fees: N1,000,000
    • Materials: N6,200,000
    • Direct labor costs: N7,000,000
    • Overheads (40% of direct labor costs): N2,800,000
    • Estimated cost to completion (excluding depreciation): N29,600,000
    • Plant and machinery used exclusively on the contract: N7,200,000 (Depreciation based on period of use)
    • Material on-site as at March 31, 2016: N600,000

The value of the plant at the end of the contract would be N1.2m and the basis of depreciation
is period of usage. Material on site as at March 31, 2016 is N600,000.

Progress payment made by ABC Limited to Akawo Limited amounted to N25.6m as at March
31, 2016.

The following information is also relevant to the contract as at March, 31 2017:

Cost incurred since the commencement of the contract to date-N40.8m.
Estimated cost to completion (excluding depreciation) N13.2m

ABC Limited paid additional N32.4m to Akawo Limited on March, 31 2017 Akawo Limited
uses percentage of completion to determine profit on a contract.

Required:
Prepare in relation to the building contract, the statement of profit or loss extracts for the years ended March 31, 2016, and 2017, and the statement of financial position extracts as at the year ended on those dates.

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  • 15 Marks

MI – May 2022 – L1 – SB – Q2b – Costing Methods

Prepare accounts for two construction contracts using a columnar format.

Wazobia is a construction company currently undertaking two separate contracts. From the following information relating to the just-concluded financial year and other data extracted from the records of the company, you are required to prepare accounts for the two contracts using a columnar format:

Contract WXYZ002 Contract WXYZ003
Contract Price ₦5,000,000 ₦3,500,000
Material Purchased ₦1,650,000 ₦950,000
Plant & Machinery Transferred to Site ₦4,500,000 ₦3,000,000
Wages Paid ₦1,460,000 ₦1,200,000
Other Expenses ₦900,000 ₦460,000
Wages Accrued ₦140,000 ₦100,000
Value of Work Certified ₦2,950,000 ₦1,800,000
Cost of Work Not Certified ₦1,600,000 ₦1,450,000
Plant & Machinery Written Down ₦3,600,000 ₦2,400,000
Material on Site C/F ₦850,000 ₦100,000

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  • 14 Marks

FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications

This question involves recalculating profit and financial position based on a change in the method for determining contract completion and explaining the difference between accounting estimates and policies.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of LB Ltd’s contracts has an agreed price of GHS 500 million and estimated total costs of GHS 400 million. The cumulative progress of this contract is:

Year ended 30 September 2011 30 September 2012
Costs incurred 160 290
Work certified and billed 150 320
Billing received 140 300

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

STATEMENT OF PROFIT OR LOSS

Description GHSm
Revenue 200
Cost of sales (160)
Profit ((100 x 160/400)) 40

STATEMENT OF FINANCIAL POSITION

Description GHSm
Current assets: Amounts due from customers
Contract costs to date 160
Profit recognised 40
Total assets 200
Progress billings (150)
Net assets 50
Contract receivables (150-140) 10

LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012. (7 marks)

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy. (2 marks)

c)

LB Ltd also sells building materials to other contractors from its warehouse and is considering setting up another retail branch in a different part of the country.

The directors have been told that the branch can be run directly through the head office or set up as a separate entity, but are not sure how the accounting will work.

Required:
Explain to the directors how this transaction should be treated in the books of LB Ltd.
(5 marks)

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  • 30 Marks

PSF – Nov 2023 – L2 – Q1 – Public Sector Financial Statements

Assess expected profit, completion stage, and financial statement recognition for a government contract under IPSAS.

Housing-for-all Corporation is an entity established by Kazua State to engage in building construction. The corporation is partly financed with subvention from the State and also from the proceeds from its operations. It applied for a bid to construct twenty (20) classroom buildings in the riverine area of the state. After all the initial procurement processes on bid-opening were carried out, the corporation won the contract in June 2018. The contract price was N220m. The building construction contract was billed for completion in two years. The company uses stages of completion on the basis of value of work completed. The following financial data were available in respect of the contract as at December 31, 2019:

Description Amount (N’000)
Total contract price 220,000
Total expected costs 180,000
Costs incurred to date 120,000
Value of work certified as complete 140,000
Amount billed to client (Kazua State) 130,000
Progress payment received from client 100,000

The contract was duly completed in June 2020.

Required:

a. Determine the expected profit of the contract, stage of completion in percentage, as well as the amount to be recognized in Housing-for-all Corporation’s income statement at December 31, 2019. (11 Marks)

b. Calculate the amount to be recognized as gross amount due to or from the client, Kazua State, the amount of trade receivable, and prepare extracts of financial statements in respect of the construction contracts at December 31, 2019. (13 Marks)

c. Identify what constitutes the composition of contract costs as contained in IPSAS 11. (6 Marks)

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  • 3 Marks

FR – NOV 2016 – L2 – Q7b – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of IAS 11's methods for determining stage of completion in construction contracts.

Briefly explain TWO methods recognized by IAS 11 which can be used to determine the stage of completion of any contract.

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  • 1 Marks

FA – May 2012 – L1 – SA – Q34 – Regulatory Environment of Accounting

Identifying the process where progress billings for payments exceed the revenue recognized in IAS for construction contracts.

In accordance with International Accounting Standard (IAS) on construction contract, the process where the rate of progress billings for payment is higher than those utilized for revenue recognition is ……………………………..

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  • 12 Marks

FA – Nov 2011 – L1 – SB – Q2c – Regulatory Environment of Accounting

This question asks about the different types of construction contract pricing.

Write short notes on the different types of construction contract pricing

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  • 2 Marks

FA – Nov 2011 – L1 – SB – Q2b – Regulatory Environment of Accounting

This question asks for the definition of construction contracts according to SAS 5.

Define “Construction Contracts” in accordance with SAS 5.

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  • 1 Marks

FA – Nov 2011 – L1 – SB – Q2a – Regulatory Environment of Accounting

This question asks for the SAS relating to construction contracts.

Which Statement of Accounting Standard (SAS) is on Construction Contract?

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  • 15 Marks

FA – Nov 2012 – L1 – SB – Q1 – Financial Statements Preparation

Explain the principles and prepare financial statements based on a construction contract.

Real Construction Company Plc. is a major construction company in Nigeria. It recognizes revenue on construction contracts by reference to the stage of completion of the contract. However, in certain circumstances, revenue is only recognized to the extent that it does not exceed recoverable contract costs.

The company is halfway through a contract to build a new overhead bridge at a contract price of N300 million.

Progress report on this contract as at 1 April 2011 is as follows:

  • Cumulative sales revenue recognized: N150 million
  • Cumulative cost of sales to date: N112 million
  • Profit to date: N38 million

The following information has been extracted from the accounting records as at 31 March 2012:

  • Total progress payment received for work certified as at 29 February 2012: N180 million
  • Total costs incurred to date (excluding rectification costs below): N195 million
  • Rectification costs: N17 million

Real Construction Company Plc. had received progress payments of 90% of the work certified as at 29 February 2012. The company surveyor estimated that the value of the further work to be completed during March 2012 would be N20 million.

At 31 March 2012, the estimated costs of uncompleted contract were put at N45 million.

The rectification costs were the costs incurred in widening the pedestrian access roads to the bridge, due to an error by the company’s architect when making the initial drawings.

The company calculates the percentage of completion of its contracts as the proportion of value earned to date compared to the contract price.

All estimates can be taken as reliable.

Required:

a. Briefly explain the principles underlying each of the two methods of recognizing revenue and describe the circumstances in which their uses are appropriate. (5 Marks)

b. Prepare extracts of the financial statements for the contract for the year ended 31 March 2012. (10 Marks)

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  • 15 Marks

FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)

Prepare the statement of profit or loss and financial position extracts based on the percentage of completion for a building contract over two years.

Akawo Limited is a building contracting firm based in Abuja. ABC Limited awarded a contract to Akawo Limited to construct a residential building in Lagos. The agreed contract price is N80 million, and the completion date is December 31, 2017.

The following are details of transactions on the contract up to March 31, 2016:

  • Contract commenced on July 1, 2015
  • Contract costs incurred by March 31, 2016, include:
    • Architects and surveyor’s fees: N1,000,000
    • Materials: N6,200,000
    • Direct labor costs: N7,000,000
    • Overheads (40% of direct labor costs): N2,800,000
    • Estimated cost to completion (excluding depreciation): N29,600,000
    • Plant and machinery used exclusively on the contract: N7,200,000 (Depreciation based on period of use)
    • Material on-site as at March 31, 2016: N600,000

The value of the plant at the end of the contract would be N1.2m and the basis of depreciation
is period of usage. Material on site as at March 31, 2016 is N600,000.

Progress payment made by ABC Limited to Akawo Limited amounted to N25.6m as at March
31, 2016.

The following information is also relevant to the contract as at March, 31 2017:

Cost incurred since the commencement of the contract to date-N40.8m.
Estimated cost to completion (excluding depreciation) N13.2m

ABC Limited paid additional N32.4m to Akawo Limited on March, 31 2017 Akawo Limited
uses percentage of completion to determine profit on a contract.

Required:
Prepare in relation to the building contract, the statement of profit or loss extracts for the years ended March 31, 2016, and 2017, and the statement of financial position extracts as at the year ended on those dates.

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  • 15 Marks

MI – May 2022 – L1 – SB – Q2b – Costing Methods

Prepare accounts for two construction contracts using a columnar format.

Wazobia is a construction company currently undertaking two separate contracts. From the following information relating to the just-concluded financial year and other data extracted from the records of the company, you are required to prepare accounts for the two contracts using a columnar format:

Contract WXYZ002 Contract WXYZ003
Contract Price ₦5,000,000 ₦3,500,000
Material Purchased ₦1,650,000 ₦950,000
Plant & Machinery Transferred to Site ₦4,500,000 ₦3,000,000
Wages Paid ₦1,460,000 ₦1,200,000
Other Expenses ₦900,000 ₦460,000
Wages Accrued ₦140,000 ₦100,000
Value of Work Certified ₦2,950,000 ₦1,800,000
Cost of Work Not Certified ₦1,600,000 ₦1,450,000
Plant & Machinery Written Down ₦3,600,000 ₦2,400,000
Material on Site C/F ₦850,000 ₦100,000

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  • 14 Marks

FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications

This question involves recalculating profit and financial position based on a change in the method for determining contract completion and explaining the difference between accounting estimates and policies.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.

One of LB Ltd’s contracts has an agreed price of GHS 500 million and estimated total costs of GHS 400 million. The cumulative progress of this contract is:

Year ended 30 September 2011 30 September 2012
Costs incurred 160 290
Work certified and billed 150 320
Billing received 140 300

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

STATEMENT OF PROFIT OR LOSS

Description GHSm
Revenue 200
Cost of sales (160)
Profit ((100 x 160/400)) 40

STATEMENT OF FINANCIAL POSITION

Description GHSm
Current assets: Amounts due from customers
Contract costs to date 160
Profit recognised 40
Total assets 200
Progress billings (150)
Net assets 50
Contract receivables (150-140) 10

LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.

Required:

(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012. (7 marks)

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy. (2 marks)

c)

LB Ltd also sells building materials to other contractors from its warehouse and is considering setting up another retail branch in a different part of the country.

The directors have been told that the branch can be run directly through the head office or set up as a separate entity, but are not sure how the accounting will work.

Required:
Explain to the directors how this transaction should be treated in the books of LB Ltd.
(5 marks)

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