Question

Question:

Question:1.    When the percentage-of-completion method of accounting for long-term contracts, the percentage of completion used to recognize gross profit in the first year usually is determined by measuring:

a.

costs incurred in the first year, divided by estimated remaining costs to complete the project.

b.

costs incurred in the first year, divided by estimated total cost of the completed project.

c.

costs incurred in the first year, divided by estimated gross profit.

d.

none of the above.

  

2.As of December 31, 2018, Cady Corporation has one construction job for which the construction in progress account has a balance of $20,000 and the billings on construction contract account has a balance of $14,000. Cady has another construction job for which the construction in progress account has a balance of $3,000 and the billings on construction has a balance of $5,000. On the December 31, 2018 Balance Sheet, Cady Corporation will report:

a.

Billings in excess of costs and profits, $6,000.

b.

Billings in excess of costs and profits, $4,000.

c.

Costs and profits in excess of billings, $4,000.

d.

Costs and profits in excess of billings, $6,000.

  

3. Handler Company is an established manufacturer of equipment used in the construction industry. Handler has the following arrangement with Chai Company.·     

. Chai purchases equipment from Handler for a price of $2,000,000 and chooses Handler to do the installation. Handler charges the same price for the equipment irrespective of whether it does the installation or not. (Some companies do the installation themselves because they either prefer their own employees to do the work or because or relationships with other customers). The installation service included in the arrangement is estimated to have a standalone price of $20,000.

.The standalone selling price of the training session is estimated at $50,000. Other companies can also perform these services.

.Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment.

. Handler delivers the equipment on September 1, 2017, and completes the installation of the equipment on November 1, 2017 (transfer of control is complete). Training related to the equipment starts once the installation is completed and lasts for 1 year.

a. How many performance obligations are in this contract?_________________

b. What is the transaction price?__________________

c. What is the allocated transaction price for the equipment?______________

Answer 1

Q1. The correct answer is , b) costs incurred in the first year, divided by estimated total cost of the completed project.

It is quiet logical that you must recognized revenue upto the extent you have incurred cost.

Eg - the total cost of project is 10 and future income from project is 15 , In first year you incurred 2 then revenue recognized will be proportionate i.e. 2 * 10/15 = 3

Q2. The right anwer is , c) Costs and profits in excess of billings, $4,000.

The Costs and profits in excess of billings is an asset. it simply means you are entitled to book higher amount (20,000+3,000) but have raised less bills (14,000+5,000) and the other case i.e. Billings in excess of costs and profits is vice-versa.

Q3. This case will be better to understand if you refer IFRS -15 Revenue from Contract with Customer .

In this scenario first let me summarize it for you -

1. The contract is completed when the installation is complete and The total Cost is of Equipment + Installation cost because 200,000 is charged whether installation services is taken from Handler or not.

2. The Training cost 50,000 is readily available in the market and can be taken independently but Chai chooses to take it from Handler.

3. There is no where mentioned in the question that Handler is charging any additional consideration for training services but we are assuming that 200,000 does not includes the charges of training because It is mentioned that Chai is obligated to pay Handler the $2,000,000 upon the delivery and installation of the equipment.

a. There are two performance obligation i.e Equipment delivery and Installation services.

b. The transaction price = 200,000.

c. The allocated transaction price for equipment is 180,000 &

the allocated transaction price for installation will be 20,000.