Recognising revenue on long-term contracts I The Stevin Company has just won a major land reclamation contract from the Dutch government. The value of the contract is A800 million and the work is expected to take four years. The expected contract cost is A550 million. Stevin recognises revenue on long-term contracts on a percentage-ofcompletion basis.

Required

(a) Stevin estimates that the percentage of the total work that will be completed each year is as follows:

Year 1 Year 2 Year 3 Year 4 18% 28% 32% 22%

Estimate the profit or loss the company will recognise on the contract in each of years 1–4.

(b) Year 1 outcomes are as forecast. However, during year 2, Stevin encounters major difficulties with the contract. The estimated cost rises to A700 million. Only 40% of the contract work will be done by end-year 2 and 75% by end-year 3. Stevin still reckons it can complete the whole of the contract by the end of year 4.

The time is mid-year 2. Revise the estimates of contract revenue and profit for years 2–4.

Check figure:

(b) Cumulative profit, end-year 3 A75m AppenedixLO1