Recognising revenue on long-term contracts II*

Early in x4 Hephaestus Construction Company was awarded a three-year contract by the French and Spanish governments to build a road tunnel through the Pyrenees. The value of the contract was 5,100. (All amounts are in millions of euros.) The tunnel was completed on schedule by late x6.

Information about costs incurred, billings made and payments received is set out below:

(In millions) x4 x5 x6 Cumulative costs incurred 1,000 2,520 4,100 Costs to be incurred (estimated at year-end) 3,000 1,680 –

Progress billings in year 1,000 1,500 2,600 Progress payments received in year 900 1,400 2,000 Required

(a) Compute the profit or loss Hephaestus recognises on the contract each year in x4, x5 and x6 under:

(i) the percentage-of-completion (POC) method (assume ‘costs incurred’ approximate work completed);

(ii) the completed contract method.

(b) Show the effect of this contract on the company’s x4–x6 balance sheets under each revenue recognition method. Assume all costs incurred are paid in cash in the year.

Check figure:

(b) Cumulative profit on contract, end-x5, POC method 540

* Problem assignment draws on material in section 2 of this chapter.

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