To attract more tourists to a beautiful part of a country, a contract has been awarded to Y p.l.c. to build an expressway road at an estimated price of £102 million which includes a budgeted profit of

£27 million. The contract includes the building of slip roads and also a tunnel under a river in order to preserve the appearance of the nearby ancient town whtch is domtnated by a castle. The time scale for the contract from start to finish is five years unless unforeseen difficulties arise.

Work commenced on 1 April1986 and for the three-year period to 31 March 1989, the !allowing data are available

The invoiced value of work certified to date includes all work to 31 March 1989 so cost of work not certified is nil.

Plant owned by the contractors bought specifically lor this contract originally cost £8 million and has been in use almost continuously since the beginning of the contract and is expected to have a residual value of £500000 at the end of the five-year contract. The straight-line method of depreciation is in use.
Cost of materials on sites at 31 March 1989 is estimated at £400000 .
Direct wages owed at 31 March 1989 were £55 000 .
The contract is regarded by management to be approximately half complete and is expected to be completed on schedule . In the previous two financial years no profits were included in the company's accounts in respect of this particular contract but the directors would now like to show a profit which is appropriate to their estimate of the degree of completion of the contract as at 31 March 1989.
You are required to

(a) (i) show the contract account lor the three-year period to 31 March 1989, (9 marks)
(ii) evaluate the work-in-progress including some profit , showing the basis and the reason(s) for your profit figure at 31 March 1989, (5 marks)
(iii) calculate one alternative profit figure to that given in your answer to

(a) (ii) above which ought to be acceptable to the directors; (2 marks)

(b) explain why it is regarded as desirable lor contracting companies to include some profit on uncompleted contracts - your explanation should contain some reference to prudence.

Transcribed Image Text:

(000) Invoice value of work certified to date Progress payments received from customer Costs: Planning, estimating and surveyors' fees 50000 40000 2000 Materials delivered to sites Materials returned from sites Direct wages paid 15000 500 8000 Wage-related costs Plant-hired 1000 3500 Site office costs: rent and rates 156 salaries and related costs 1200 Apportioned head office costs 750 Direct expenses incurred (insurance, bank interest etc) 1804