(a) How and why do companies account for profits on uncompleted contracts? (8 marks)

(b) From the following information prepare a contract account for the year ending 31 December 20X0. Show clearly the amount of profit that may prudently be taken.

The money received from the client (£425,000) was equivalent to the value of work certified less the agreed 15 per cent retention. Paddy Quick uses the fraction 2/3 in calculating the profits on uncompleted contracts

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Paddy Quick Construction Co Contract No. 1234 (Start date 1 January 20X0) Contract price 850,000 Materials issued to site during 20X0 120,480 Materials returned to stores 1,460 Materials on site, 31 December 20X0 15,340 Direct wages 134,200 Wages owing at 31 December 20X0 5,220 Plant issued to contract (at cost) 82,600 Plant value at 31 December 20X0 63,200 Subcontractors' charges 27,560 Head office expenses charged to contract 71,430 Direct expenses (site expenses) 42,570 Direct expenses owing at 31 December 20X0 2,840 Work certified by architect 500,000 Cost of work not yet certified 27,350