CHAPTER 2: ACCOUNTING FOR PROPERTY DEVELOPMENT

QUESTION 1

Syarikat Harapan Cerah Bhd acquired a 20-hectare piece of land in January 2018 at a cost of RM10 million, with the intention to develop the land to become a new city at Batu Kawan, Penang. Other costs incurred to buy the land are professional fees RM250,000 and stamp duties RM50,000. The company also incurred another RM500,000 in levelling and clearing the land.

The company intends to develop the land in two phases: Phase I and Phase II. Phase I is taking up 5 hectares for the construction of single-storey house and Phase II is taking up 10 hectares for the construction of bungalow. The balance of 5 hectares is used to develop a common area.

Construction work commenced on 1 March 2018 and expected to complete by year 2020. The financial data for 2018 financial year are as follows:

Phase I (single storey)Phase II (bungalow)

Units to be developed100 units50 units

Unit sold40 units30 units

Selling price per unitRM300,000RM500,000

Development costs incurred to date RM2,000,000RM3,000,000

Common cost allocatedRM1,636,364RM1,363,636

Estimates of development costs to completeRM4,000,000RM8,000,000

REQUIRED:

(a)Determine percentage of completion for Phase I and II using the cost-to-cost basis (Round up your answer to 1 decimal point).

(b)Prepared a partial Statement of Profit and Loss for the year ended 2018 showing the amount of revenue and expenses to be recognized. (Round up your answer to the nearest RM).

(c)Assume the company cannot determine the percentage of completion reliably, how should the company recognize its revenue during year 2018?

Please answer with explanation in detail and also the calculation