Question 2. (10 marks)

On 1 January 2021, M&A Ltd enters into a contract with a hotel owner to refurbish the entire 10-storey hotel building. The contract includes replacing and installing new elevators. The contract price is $16m. M&A Ltd concludes that in this service contract, the supply of labour, materials and the elevators to be installed are a single performance obligation in its promise to refurbish the entire hotels for the owner. The estimated total costs to fulfil the contract is $12m. To measure the stage of completion, M&A Ltd uses the costs incurred basis (an input method).

As at 30 June 2021, the following costs are incurred:

Director labour $4m (of the material costs, $1 million is in respect of materials that have not yet been used)

Direct materials $2.5m (of the labour costs, $500,000 is an advance payment to subcontractors who had not performed their work on the project as at 30 June 2021)

Allocated overheads $1m

M&A Ltd received $6,400,000 on 30 June 2021 from the hotel owner.

Required:

Calculate the profit to be included by M&A Ltd for the year ended 30 June 2021 and prepare all the journal entries to record the transactions described. Assume all costs are paid for in cash.