Consultat Inc is a firm of consulting engineers, newly established to advise on a large project taking three years to complete. Their fee for this work is a percentage of the total project costs, payable on completion of the project. In the interim, advances on the final fee are made at six-monthly intervals. The total project costs will not be known until the project is completed. The following advances were received by Consultat Inc during the three-year period:

When the total costs were computed during the year ended 31 December 20X0, it was found that a further sum of £50,000 was due to Consultat Inc.

Required:

(a) Explain how Consultat Inc would show the payments made during the periods covered by the project. Justify your explanation in terms of the concepts of accounting which you consider apply to this situation.

(b) Would you change your reasoning at all in the light of the following information?

(i) the advance payments are not contractual but discretionary on the part of the paying company;

(ii) a clause in the consulting agreement requires Consultat Inc. to undertake — free of charge — extra work to remedy defects appearing within three years of the completion of the project.

Suggest how you would treat these problems by reference to accounting concepts.

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year ended 31 December 20X0 year ended 31 December 20X1 year ended 31 December 20X2 25,000 30,000 30,000