On June 15, 2013, Sanderson Construction entered into a long-term construction c

Question

On June 15, 2013, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $370 million. The expected completion date is April 1 of 2015, just in time for the 2015 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows (S in millions): 2013 2014 2015 $70 $110 $80 Costs incurred during the year Estimated costs to complete as of 12/31 180 60 Required 1. Determine the amount of gross profit or loss to be recognized in each of the three years using the percentage-of-completion method. Gross Profit (Loss) (S in millions) Year 2013 2014 2015 2. Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three FRS. 2014 2015 2013 Revenue Cost Gross profit (loss) Explanation: 13

Explanation / Answer

1. Amount of gross profit using percentage of completion method :-

Percentage of completion = cost incurred during the year / total estimate cost of completion

Revenue recognize during the year = Total revenue * percentage of completion

Gross profit = Revenue recognize during the year - cost incurred during the year

2. Cost recovery method as per IFRS :- IAS 18

This method is used where the the recoverability of revenue is not certain. This method require to recognize revenue only when the cost element of the sale is paid in cash by the customer. Once the cash payments have recovered the seller's costs, all remaining cash receipts (if any) are recorded in income as received.

In this case, as it is a long tem contract and contract revenue is received at the end of the term. Thus, we will recognize revenue at the term end.

Year Cost incurred Estimate Total cost % of completion Total revenue Revenue recognized Gross Profit 1 70 70+180 = 250 70/250 = 28% 370 370 * 28% = 103.6 103.6 - 70 = 33.6 2 110 70+110+60 =240 110/240 = 45.83 370 370 * 45.83% = 169.58 169.58 - 110 = 59.58 3 80 70 + 110 + 80 = 260 - 370 370 - 103.6 - 169.58 = 96.82 96.82 - 80 = 16.82

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