Question $1$

Shaftesbury Construction Ltd owned a contract to build a swimming pool. The

construction was scheduled for completion by $19$ December $2022.$ One term of the

contract stated that Shaftesbury Construction Ltd was to deduct $10,000$ from the

$6,000,000$ total contract value for each week that completion was delayed.

Completion was delayed by five weeks, which resulted in a $50,000$ penalty.

Shaftesbury Construction Ltd can estimate the outcome of the contract reliably only

when a contract is at least $40\%$ complete.

Below are the data related to the costs, billings and cash receipts:

Required:

a$.$ Calculate overall profit or loss on the contract estimated at the end of each

year.

b$.$ Calculate contract's annual revenue, cost of sales and profit or loss

recognized in the Income Statement for each year, using the percentage of

completion method where appropriate.

c$.$ Show the accounting entries each year assuming costs incurred are paid in

cash.

d$.$ Show the Balance Sheet amounts for Accounts receivable and Contract$-$in$-$

progress accounts at the end of each year. Explain what the outstanding

balance on the "Contract$-$in$-$progress" account indicates.

$(9$ marks$)$

e$.$ Accounting standards $($IAS $11)$ allow companies to recognize profit before

a construction contract is completed. Discuss the rationale behind this

accounting treatment and why the requirements of accounting standards for

inventories are not applicable to construction contracts.