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13: Job, batch and contract costing ⏐ Part D Costing and accounting systems
(d) The amount of profit taken to the income statement for an incomplete contract should be judged with
prudence.
(e) If it is expected that there will be a loss on the contract as a whole, provision needs to be made for the
whole of the loss as soon as it is recognised (in accordance with the prudence concept). The amount of
the loss should be deducted from the amounts for long-term contracts included under inventories, and
where a credit balance results, it should be disclosed separately under accounts payable or allowances for
liabilities and charges.
10.2 IAS 11 disclosures – statement of financial position
Balances relating to long-term contracts are split into two elements.
(a) Work done on long-term contracts not yet recognised in the income statement is disclosed under
'inventories' as 'long-term contract balances'.
(b) The difference between
(i)
amounts recognised as revenue
X
(ii)
progress payments received
(X
)
X
will be recognised in accounts receivable as 'amounts recoverable on long-term contracts' if (i) is greater
than (ii), or will be offset against the balances in (a) above if (ii) is greater than (i).
Question
Income statement and statement of financial position
During its financial year ended 30 June 20X7 Beavers Co, an engineering company, has worked on several contracts.
Information relating to one of them is given below.
Contract X201
Date commenced 1 July 20X6
Estimated completion date 30 Sept 20X7
Contract price $240,000
Proportion of work certified as satisfactorily completed (and
invoiced) up to June 20X7 $180,000
Amount received from contractee $150,000
Costs up to 30 June 20X7
Wages $91,000
Materials sent to site $36,000
Other contract costs $18,000
Proportion of head office costs $6,000
Plant and equipment transferred to the site (at book value on 1 July 20X6) $9,000
The plant and equipment is expected to have a book value of about $1,000 when the contract is completed.
Inventory of materials at site on 30 June 20X7 $3,000
Expected additional costs to complete the contract
Wages $10,000
Materials (including inventory at 30 June 20X7) $12,000
Other (including head office costs) $8,000
Company policy is to recognise profit on contracts as follows.
Profit to be recognised =
valuecontract total
certified work of value
× estimated total contract profit
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