Chapter 16 Inventories and Construction Contracts

Required:

Discuss the principles that underlie each of the two methods and describe the circumstances in which their use is appropriate. (5 marks)

(b) Linnet is part way through a contract to build a new football stadium at a contracted price of $300 million. Details of the progress of this contract at 1 April 20X3 are shown below:

The following information has been extracted from the accounting records at 31 March 20X4:

Linnet has received progress payments of 90% of the work certified at 29 February 20X4. Linnet's surveyor has estimated the sales value of the further work completed during March 20X4 was $20 million.

At 31 March 20X4 the estimated remaining costs to complete the contract 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.

All estimates can be taken as being reliable.

Required:

Prepare extracts of the financial statements for Linnet for the above contract for the year to 31 March 20X4. (8 marks)

(ACCA 2.5 Financial Reporting June 2004 Q5(a))


Question 4
Torrent is a large publicly listed company whose main activity involves construction contracts. Details of three of its contracts for the year ended 31 March 20X6 are:

Notes
(i) The company's normal policy for determining the percentage completion of contracts is based on the value of work invoiced to date compared to the contract price. Progress payments received represent 90% of the work invoiced. However, no progress payments will be invoiced or received from contract Ceta until it is completed, so the percentage completion of this contract is to be based on the cost to date compared to the estimated total contract costs.

(ii) The cost to date of $12·5 million at 31 March 20X6 for contract Alfa includes $1 million relating to unplanned rectification costs incurred during the current year (ended 31 March 20X6) due to subsidence occurring on site.
(iii) Since negotiating the price of contract Beta, Torrent has discovered the land that it purchased for the project is contaminated by toxic pollutants. The estimated cost at the start of the contract and the estimated costs to complete the contract include the unexpected costs of decontaminating the site before construction could commence.