You are required to prepare the contract account for the year ended 31 December 2010, and show the calculation of the sum to be credited to profit and loss for that year.

On 1 April 2010 MN Ltd commenced work on a contract which was to be completed by 30 June 2011 at an agreed price of £520,000.

MN Ltd’s financial year ended on 31 December 2010, and on that day expenditure on the contract totalled £263,000 made up as under:

Cash totalling £195,000 had been received by 31 December 2010 representing 75% of the work certified as completed on that date, but in addition, work costing £30,000 had been completed but not certified.
A sum of £9,000 had been obtained on the sale of materials which had cost £8,000 but which had been found unsuitable. On 31 December 2010 unused materials on site had cost £10,000 and the plant was valued at £20,000.
To complete the contract by 30 June 2011 it was estimated that:

(a) the following additional expenditures would be incurred:

(b) further plant costing £25,000 would be required;

(c) the residual value of all plant used on the contract at 30 June 2011 would be £15,000;

(d) head office charges to the contract would be at the same annual rate plus 10%.
It was estimated that the contract would be completed on time but that a contingency provision of £15,000 should be made. From this estimate and the expenditure already incurred, it was decided to estimate the total profit that would be made on the contract and to take to profit and loss, for the year ending 31 December 2010, that proportion of the total profit relating to the work actually certified to that date.

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Plant 30,000 Materials 124,000 Wages 95,000 Sundry expenses 5,000 Head office charges 9,000 263,000