Percentage of completion – NBC Institute

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.

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Construction Contracts, Contract Accounting, Percentage of completion, Revenue Recognition
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2018

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.

Question

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)

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting estimates, Accounting policy, Construction Contracts, Contract Completion, Financial Reporting, IAS 11, Percentage of completion, Profit Calculation, Work certified
Level: Level 3

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2015

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.

Question

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.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Construction Contracts, Contract Accounting, Percentage of completion, Revenue Recognition
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2018

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.

Question

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

Required:

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

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)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Accounting estimates, Accounting policy, Construction Contracts, Contract Completion, Financial Reporting, IAS 11, Percentage of completion, Profit Calculation, Work certified
Level: Level 3

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2015

Question Tag: Percentage of completion

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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.

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.

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.

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.

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Question Tag: Percentage of completion

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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.

You're reporting an error for "FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)"

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.

You're reporting an error for "FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications"

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.

You're reporting an error for "FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)"

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.

You're reporting an error for "FR – Nov 2015 – L2 – Q4b and c- Financial Reporting Standards and Their Applications"

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