Tinka Ltd signs a contract on 1 May 2018 to build an office building. The construction is scheduled to commence 1 July 2018 and the estimated date of completion is 30 June 2021. The cost of the building is estimated to be $120m and the total contract price is fixed at $134m. The following data relates to the construction period:
| For the year ended 30 June | |||
| 2019 | 2020 | 2021 | |
| $’000 | $’000 | $’000 | |
| Costs to date | 48,000 | 84,000 | 120,000 |
| Estimated Costs to complete | 72,000 | 36,000 | – |
| Progress billings to date | 40,000 | 84,000 | 134,000 |
| Cash received to date | 19,000 | 79,000 | 134,000 |
Assume that actual costs and cash collections coincide with expectations and that cost (an input measure) is used as the basis for assessing progress on the construction contract.
Required
Assuming the level of progress can be reliably measured:
- Determine the percentage of completion for 2019, 2020 and 2021. (11 marks)
| 2019 | 2020 | 2021 | |
| $’000 | $’000 | $’000 | |
| Costs to date | |||
| Costs incurred for the year | |||
| Estimated costs to complete | |||
| Estimated total cost | |||
| Per cent of completion (POC) |
- Calculate the gross profit for 2019, 2020 and 2021. (13 marks)
| 2019 | 2020 | 2021 | |||||
| $’000 | $’000 | $’000 | |||||
| Estimated total gross profit | |||||||
| POC x Estimated total gross profit | |||||||
| Less Gross profit recognised in previous years | |||||||
| = Gross profit recognised for the year | |||||||
| Construction revenue for the year | |||||||
- Using the percentage of completion method, provide the journal entries for 2019, 2020 and 2021. (9 marks)
| 2019 | 2020 | 2021 | |||
| (i) | To record costs incurred: | ||||
| (ii) | To record billings to customers: | ||||
| (iii) | To record cash collections: | ||||
| (iv) | To record periodic income recognised: | ||||
TOTAL MARKS FOR PRACTICAL QUESTION: 33
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