Question 2

Adams Construction is a family owned construction company that has been operating successfully in the industry for the past 50 years. They specialise in large scale construction projects and also in certain community projects pro bono. As the years have passed and the industry has changed, especially with the introduction of new technologies, Adams has needed to adapt and incorporate the technological advancements into their production processes. The companys CEO, Divian Adams, has recently come under fire for his questionable accounting practices. Most notably, there has been intense scrutiny about the following two issues that Divian has brought to your attention. As a newly qualified accounting graduate, you are perfectly suited to the task at hand. Divian has asked that you propose the correct accounting treatment for the following two issues:

Issue 1:

Adams Construction recently purchased a machine from a reputable manufacturer in China for R1 500 000. The machine will be used in the construction process of Adams and it was anticipated that the process would become more efficient with the introduction of the machine. The terms of the agreement with the Chinese supplier was that the machine was shipped DAT. The machine was placed on a ship headed for Cape Town on the 20 August 2014. The boat was expected to dock at Cape Town on 1 September. However, due to inclement weather, the boat only docked on the 9 September. When the machine arrived, initial testing showed poor results for the construction process which meant that Adams Construction management was uncertain about introducing the machine into the process. Based on industry knowledge and consultation of an expert, it was found that the probability of generating efficiencies with the new machine was highly unlikely.

Issue 2 :

As a policy, Adams Construction renders its construction services with various payment options. Most of the options centre around payment for the service rendered being made after the service has been rendered. During the current financial year, one of Adams Constructions biggest clients paid R500 000 for a contract that they recently agreed with Adams Construction. This contract is set to run for 3 years with construction services being rendered evenly over the contracted period. At year end, services for 9 months have been rendered. At year end, the bookkeeper was unsure of the accounting treatment for the contract.

You are required to:

1. Issue 1: Advise Adams Construction whether or not they can recognise the new machine as an asset using full definition and recognition criteria of the Conceptual Framework. (8)

Issue 2: Using full definition and recognition criteria of the Conceptual Framework, discuss how the issue identified will be treated in the financial statements of Adams Construction. (10)