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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:
The following information has been extracted from the accounting records as at 31 March 2012:
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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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)
Find Related Questions by Tags, levels, etc.
Find Related Questions by Tags, levels, etc.
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:
The following information has been extracted from the accounting records as at 31 March 2012:
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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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)
Find Related Questions by Tags, levels, etc.
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