Question
Question 4 HQ Ltd commences construction of an office building on 1 January 2018 for JX Ltd. The construction contract is considered to represent one
Question 4
HQ Ltd commences construction of an office building on 1 January 2018 for JX Ltd. The construction contract is considered to represent one performance obligation and will be the unit of account for contract accounting. It signs a fixed price contract for total revenue of $20 million. The project is expected to be completed by 31 December 2020. The expected total cost as estimated at the commencement of construction is $16 million. The expected cost to complete the construction project can change throughout the project (in this case it does).
The following information relates to the project:
2018 ($000) | 2019 ($000) | 2020 ($000) | |
---|---|---|---|
Costs for the year | 8000 | 5000 | 4500 |
Costs incurred to date | 6000 | 11500 | 17500 |
Estimated costs to complete | 11500 | 6000 | 0 |
Progress billings during the year | 8500 | 4500 | 7000 |
Cash collected during the year | 7500 | 6500 | 6000 |
HQ Ltd uses cost (an input measure) as the basis for measuring progress towards satisfaction of the performance obligation. The asset under construction is deemed to be under the control of JX Ltd. Actual costs to complete the project deviate from expectations.
Required:
a) Calculate the income recognized each year using the percentage completion method. (Show all workings)
b) Provide the journal entries for the year 2018, assuming that the stage of completion and the outcome of the construction contract can be reliably estimated.
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