- 12 Marks
FR – NOV 2016 – L2 – Q7a – Revenue from Contracts with Customers (IFRS 15)
Question tests understanding of how to account for long-term construction contracts, focusing on stage of completion and profit recognition.
Question
Alpha Plc started a 4-year contract to build a dam. Activities commenced on February 1, 2015. The total contract price amounted to N30billion, and it was estimated that work would be completed at a total cost of N23.75billion. In the construction agreement, the customer agreed to accept increase in wages tariffs in addition to the contract price.
The following information relates to contract activities for the financial year ended December 31, 2015.
(1) Cost for the year:
| N’million | |
|---|---|
| Material | 3,500 |
| Labour | 2,000 |
| Operating Overheads | 375 |
| Subcontractors | 450 |
(2) Current estimate of total contract costs indicates the following:
i. Material will be N450million higher than expected.
ii. Total labour cost will be N750million higher than expected. Of this amount only N600million will be the result of increase in wage tariffs. The remainder will be caused by inefficiencies.
iii. A savings of N75million is expected on operating overheads.
(3) During the year ended December 31 2015 the customer requested a variation to the original contract and it was agreed that the contract price would be increased by N2.250billion. The total estimated cost of this extra work is N1.875billion.
(4) By the end of year 2015, certificate issued by the quantity surveyors indicated a 25% stage of completion.
Required:
Calculate the profit to date based on:
i. Option A – Contract cost in proportion to estimated contract costs. (6 Marks)
ii. Option B – Percentage of work certified. (6 Marks)
Find Related Questions by Tags, levels, etc.
- Tags: Contract Accounting, Contract Revenue, Profit Recognition, Stage of Completion
- Level: Level 2
- Topic: Revenue from Contracts with Customers (IFRS 15)
- Series: NOV 2016