Miracle Construct Inc. signed a fixed price $12 million contract to construct the tallest building in the country over three years. In the first year, they incurred $5.5 million in costs including $1 million in site labor, $3 million in materials, $500,000 in depreciation of equipment, and $1 million in marketing. They estimate it will cost another $5.5 million to complete the project.
Miracle Construct Inc. signed a fixed price $12 million contract to construct the tallest building in the country over three years. In the first year, they incurred $5.5 million in costs including $1 million in site labor, $3 million in materials, $500,000 in depreciation of equipment, and $1 million in marketing. They estimate it will cost another $5.5 million to complete the project.
Miracle Construct Inc. signed a fixed price $12 million contract to construct the tallest building in the country over three years. In the first year, they incurred $5.5 million in costs including $1 million in site labor, $3 million in materials, $500,000 in depreciation of equipment, and $1 million in marketing. They estimate it will cost another $5.5 million to complete the project.
Miracle Construct Inc. signed a fixed price $12 million contract to construct the tallest building in the country over three years. In the first year, they incurred $5.5 million in costs including $1 million in site labor, $3 million in materials, $500,000 in depreciation of equipment, and $1 million in marketing. They estimate it will cost another $5.5 million to complete the project.
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Construction Contracts IAS 11
1. Miracle Construct Inc. is executing a gigantic project of constructing
the tallest building in the country. The project is expected to take three years to complete. The company has signed a fixed price contract of $12,000,000 for the construction of this prestigious tower. The details of the costs incurred to date in the first year are Site labor costs $1,000,0 00 Cost of construction material 3,000,00 0 Depreciation of special plant and equipment used in-contracting to build the tallest building 500,0 00 Marketing and selling costs to get the tallest building-in the country the right exposure 1,000,0 00 Total $5,500,0 00 Total contract cost estimated to complete $5,500,0 00 Required Calculate the percentage of completion and the amounts of revenue, costs, and profits to be recognized under IAS 11. 1. Lazy Builders Inc. has incurred the following contract costs in the first year on a two-year fixed price contract for $4.0 million to construct a bridge: Material cost = $2 million Other contract costs (including site labor costs) = $1 million Cost to complete = $2 million How much profit or loss should Lazy Inc. recognize in the first year of the three-year construction contract? (a) Loss of $0.5 million prorated over two years. (b) Loss of $1.0 million (expensed immediately). (c) No profit or loss in the first year and deferring it to second year. (d) Since 60% is the percentage of completion, recognize 60% of loss (i.e., $0.6 million).
2. Brilliant Inc. is constructing a skyscraper in the heart of town and has
signed a fixed price two-year contract for $21.0 million with the local authorities. It has incurred the following cost relating to the contract by the end of first year: Material cost = $5 million Labor cost = $2 million Construction overhead = $2 million Marketing costs = $0.5 million Depreciation of idle plant and equipment = $0.5 million At the end of the first year, it has estimated cost to complete the contract = $9 million. What profit or loss from the contract should Brilliant Inc. recognize at the end of the first year? (a) $1.5 million (9/18 3.0) (b) $1.0 million (9/18 2.0) (c) $1.05 million (10/19 2.0) (d) $1.28 million (9.5/18.5 2.5) 3. Mediocre Inc. has entered into a very profitable fixed price contract for constructing a high-rise building over a period of three years. It incurs the following costs relating to the contract during the first year: Cost of material = $2.5 million Site labor costs = $2.0 million Agreed administrative costs as per contract to be reimbursed by the customer = $1 million Depreciation of the plant used for the construction = $0.5 million Marketing costs for selling apartments when they are ready = $1.0 million Total estimated cost of the project = $18 million The percentage of completion of this contract at the year-end is (a) 50% (= 6.0/18.0) (b) 27% (= 4.5/16.5) (c) 25% (= 4.5/18.0) (d) 39% (= 7.0/18) 4. A construction company is in the middle of a two-year construction contract when it receives a letter from the customer extending the contract by a year and requiring the construction company to increase its output in proportion of the number of years of the new contract to the previous contract period. This is allowed in recognizing additional revenue according to IAS 11 if
(a) Negotiations have reached an advanced stage and it is probable
that the customer will accept the claim. (b) The contract is sufficiently advanced and it is probable that the specified performance Standards will be exceeded or met. (c) It is probable that the customer will approve the variation and the amount of revenue arising from the variation and the amount of revenue can be reliably measured. (d) It is probable that the customer will approve the variation and the amount of revenue arising from the variation, whether the amount of revenue can be reliably measured or not. 5. A construction company signed a contract to build a theater over a period of two years, and with this contract also signed a maintenance contract for five years. Both the contracts are negotiated as a single package and are closely interrelated to each other. The two contracts should be (a) Combined and treated as a single contract. (b) Segmented and considered two separate contracts. (c) Recognized under the completed contracted method. (d) Treated differentlythe building contract under the completed contract method and maintenance contract under the percentage of completion method.
