ACC208: Intermediate Financial Accounting:

On 1 January 20x1, CC Construction Ltd ("CCC") won a contract to refurbish a property for $1,800,000. The refurbishment project would include the dismantling and disposal of some existing fixtures, installing new lighting system, replacing various existing fixtures and constructing new fixtures as per the agreed design. The project was expected to be completed by the end of 20x2. CCC would do the following progress billings: (i) $1,000,000 in 20x1 and (ii) $800,000 on completion in 20x2.

In 20x1, the actual costs incurred for the project amounted to $900,000. It was estimated that an additional cost of $1,100,000 was required to complete the project. Collections for the year amounted to 80% of the progress billing.

In 20x2, the actual costs for the year came up to $1,200,000. The project was duly completed with no more additional costs required. The balance due from the customer was fully collected.

CCC adopts the Singapore FRSs, has December 31 year-ends and uses the input cost method to measure the entity's progress towards the completion of performance obligations.

Required:

(a) Applying FRS 115 Revenue from Contracts with Customers, illustrate the accounting of the above construction contract by preparing the necessary journal entries (journal narrative not required) for the year ended 31 December 20x1. In addition, if any event or transaction does not require any journal entry, please state clearly in your answers. (18 marks)

(b) Now, assume on 1 January 20x2, the customer decided to modify the on-going contract by enhancing the lighting system with an energy-saving feature unique to the lighting system used in the property. The customer would also like to build additional storage cabinets in the property. These additional storage cabinets would not affect the original contract as they could be added after the completion of the existing contract performance obligations have been completed. Due to these modifications, there was a change in price of the contract to reflect the modifications agreed. Discuss how these contract modifications should be accounted for under FRS 115. (7 marks)