Question 3 (10 marks) Kruger Construction began work on a government contract at

Question

Question 3 (10 marks)
Kruger Construction began work on a government contract at the start of 2007. The contract was to construct a special building for $4,000,000. In making the bid, construction costs were estimated to be $3,000,000. Data during the construction period was:

How much income on the contract would be reported for each year

assuming: (a) Completed contract method? 2007: $______________ 2008: $_______________.
(b) Percentage-of-completion method? (basis: estimated costs to complete) 2007: $________________ 2008: $_______________.

2007 2008 cost incurred during the year $600,000 $2,550,000 estimated cost to complete as of 12/31 2,400,000 0 billings to the government during the year 720,000 3,280,000 cash collected during the year 500,000 3,500,000

Explanation / Answer

Completed contract method Income for 2007 is Nil   Income for 2008 is                  850,000.00 Statement showing computations Particulars Amount Total billings = 720,000 + 3,280,000              4,000,000.00 Total costs = 600,000 + 2,550,000              3,150,000.00 Income                  850,000.00 Percentage-of-completion method Revenue to be recognised in 2007 = 600,000/3,000,000 *4,000,000                  800,000.00 Costs in 2007                  600,000.00 Income in 2007                  200,000.00 Remaining revenue to be recognised in 2008 = 4,000,000 - 800, 000              3,200,000.00 Costs in 2008              2,550,000.00 Income for 2008 is                  650,000.00

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