Question

MULTIPLE-CHOICE questions E1-1.ABC Engineering use cost method to cart engineering use cost method to calculate the stage of completion of its construction act. Total estimated contract costs of their contract are $100 million. In the first year of their contract, ABC Engineering has incurred the following costs: Cost of purchase of raw materials worth $10 million ($5 million of which are unused by the year end) 2. Payment of salaries and wages of $5 million ($1 million of accrued salaries are unpaid by the year end) 3. Payment of advances to subcontractors of $20 million (Subcontractors have performed work equal to 50% of the amount of advance by the year end) What is the percentage of Stage of Completion of the construction contract? a) 26% b) 20% c) 31% d) 21% E1-2.Strong Construction Ltd. entered in the three-year fixed price contract for $4 million. The costs incurred during the first year are: • Material cost of $1.6 million • Other direct costs, including site labor costs, of $1 million • Expected cost to complete $2 million Strong Construction Ltd. should recognize profit or loss in the first year of the three-year fixed price contract. How much is it? a) No profit or loss recognized b) Loss of $200,000 prorated over three years. c) Loss of $600,000 d) Loss of $340,000 based on the stage of completion. E1-3. Dream Construction Co. Signed a contract to build an ice-skate ring over a period of two year, and with this contract also signed a maintenance contract for five years. The negotiation considered both contracts as a package and are closely interrelated to each other. The two contracts should be a) Combined and treated as only one contract b) Segmented and considered them as two separate contracts c) Recognized under the completed-contract method d) Treated differently - apply accrual concept to the ice-skate ring contract, and cash concept to the maintenance contract. Advanced accounting 1 page 111

Answer 1

cost Incurred during 1st year = Cost of Raw material purchased Add: Payment of salasie, and wages Add! Accurred wages & Sulares Addi soy. of amount to subcontralt 3) $5 million t 66 million + $10 million 2) 121 million Total contract cost & Cost of contrential completed x 100 Total contract Price 2 21 y loo o 21% Loption of) loo Percentage of completion = 21% (option (d). E1-2 Contract Price = $ 4 million Percentage of completion & Expected cost to complete In contract costing & Loss should be recognised Purmediately, As treated as an expeuse Hence, option (c) gloss of $6,00,000 is correct loss on contract fired contract Price - material cost Labour cost - Estimated cost to complete contract 2) 4-1.6 - 1-2 ) 0.6 million. Heure , $6,00,000 option (c) is correct

Construction contract or Separate or In the A Contract contract when it completely exclusive given case, Dream is is to recognised as a Sigued separately. another. contruction co. signed o Contruction Contract a maintenance Contract Sefarately, Hence, them option (6) Segmented and as Two & gefarate considered contract. F4-4, Cost Incurred upto &year= Cost of material t site Labour cost + Agreed Administrative cost + Repreciation of Plant t marketing cost of seldicy 9.5mt ant million for milliont a million 2) 2) & 1 million Total estimated cost of Project = 8 18 million Percentage of completion > Cost Tuurred upto & year Total estimated wast of 2) 7 x 100 a) 390%. (01) 39%