Question 2 (9 marks)

Precision Ltd entered into a contract on 2 January 2019 with a customer to construct a customised plant for a consideration of $10 million to meet the customer's unique requirements.

The terms of the contract include a penalty of $500,000 if the completion of the plant is delayed by a month and another $500,000 for more than a month from the target completion date stipulated in the contract.

Precision Ltd is entitled to receive payment for performance completed to date if the contract is terminated by the customer. The customer is a financially strong company which has a reputation of fulfilling its obligations promptly.

Required:

For Precision Ltd,

a)Is the transaction price of the contract a fixed or a variable amount? Explain.

(3 marks)

b)Assuming that the probability of completing the plant by the date specified in the contract is 95% while that of delay by a month or more than a month is 4% and 1% respectively, determine the transaction price based on the two methods prescribed in FRS 115.

Which is the preferred method? Explain.(6 marks)