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Unformatted text preview: 1 AF3110 Intermediate Accounting 1 2009/10 Semester 2 Topic 5 Question 1 (Chapter 11 Q11) (i) Linnet is a large public listed company involved in the construction industry. Accounting standards normally require construction contracts to be accounted for using the percentage (stage) of completion basis. However, under certain circumstances they should be accounted for using the completed contracts basis. Required: Discuss the principles that underlie each of the two methods and describe the circumstances in which their use is appropriate. (ii) Linnet is part way through a contract to build a new football stadium at a contracted price of $300 million. Details of this contract at 1 April 20X6 are shown below: $ million Cumulative sales revenue invoiced 150 Cumulative cost of sales to date 112 Profit to date 38 The following information has been extracted from the accounting records at 31 March 20X7: $ million Total progress payment received for work certified at 29 February 20X7 180 Total costs incurred to date (excluding rectification costs below) 195 Rectification costs 17 Linnet has received progress payments of 90% of the work certified at 29 February 20X7. Linnet ’ s surveyor has estimated the sales value of the further work completed during March 20X7 was $20 million. At 31 March 20X7, the estimated remaining costs to complete were $45 million. The rectification costs are the costs incurred in widening access roads to the stadium. This was the result of an error by Linnet ’ s architect when he made his initial drawings. Linnet calculates the percentage of completion of its contracts as the proportion of sales value earned to date compared to the contract price. 2 All estimates can be taken as reliable. Required: Prepare extracts of the financial statements for Linnet for the above contract for the year to 31 March 20X7. Question 2 Zamponi’s Construction Company reports its income for tax purposes on a completed-contract basis and income for financial statement purposes on a percentage-of-completion basis. A record of construction activities for 2006 and 2007 follows: Project Contract Price Cost Incurred - 2006 Estimated Cost to Complete Cost Incurred - 2007 Estimated Cost to Complete A $1,450,000 $840,000 $560,000 $480,000 $0 B 1,700,000 720,000 880,000 340,000 650,000 C 850,000 160,000 480,000 431,500 58,500 D 1,000,000 0 0 280,000 520,000 General and administrative expenses for 2006 and 2007 were $60,000 for each year and are to be recorded as a period cost. each year and are to be recorded as a period cost....
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This note was uploaded on 10/20/2010 for the course AD abc123 taught by Professor Cat during the Summer '09 term at City University of Hong Kong.
- Summer '09