5.4 Black started business at the beginning of year 1 as a bridge builder. During years 1 to 8 he completed the following contracts:

Year in which the contract was completed 2

3 3

5 7

7 7

8 Contract number 1

2 36 4

5 7

8 Value of contract, i.e. revenue £000 800 840 1,200 100 1,600 1,500 700 1,500 He had no partly completed contracts at the end of year 8.

The following table shows the expenditure for each year analysed among the different contracts. It also shows ‘general overheads’, i.e. expenditure which Black could not sensibly allocate to the various contracts:

Contracts General Year Total 1

2 3

4 5

6 7

8 overheads

(£000)

1 500 200 100 200 2

1,000 200 100 400 300 3

1,270 400 400 100 370 4

690 200 250 240 5

660 100 250 80 230 6

1,330 400 250 300 380 7

1,210 200 250 100 300 360 8

880 600 280 7,540 400 600 800 1,000 1,000 80 400 900 2,360 A consulting civil engineer visited a number of the sites on 31. December of some years and issued certificates showing his estimates of the ‘value’ of the work done to date. The following schedule gives details of the certificates issued:
Date Contract (£000)
31 Dec. year 2 2 300 31 Dec. year 2 3 600 31 Dec. year 4 4 350 31 Dec. year 5 4 500*
31 Dec. year 5 5 400 31 Dec. year 6 4 1,000*
31 Dec. year 6 5 700*
31 Dec. year 6 7 400 31 Dec. year 7 8 350 * These are cumulative figures.
Required:

(a) Show Black’s profits for the years 1 to 8 inclusive using the following methods:
(i) The revenue for each contract is recognised in the year in which the contract is completed (i.e. all the profit on a contract is taken in the year in which the contract is completed).
(ii) Black estimates the total profit on each contract and allocates that profit between the years on the following basis:
Profit recognised during the year „ . , . Expenditure on contract for the year = Estimated total profit x-;---
Estimated total expenditure Assume that Black’s estimates are completely accurate.
(iii) Elncompleted contracts are ‘valued’ on the basis of the certificates or, if one has not been issued, on the total expenditure to date.

(b) Discuss the comparative advantages and disadvantages of the above methods.