You are the recently-appointed financial controller for Buttercup Bluebell Builders plc (Buttercup), a UK construction company. You are preparing the companys financial statements for the year ended 31 October 2022 in accordance with International Financial Reporting Standards.

You need to complete your work on a contract which is still in progress at the year end. You have already identified that a contract exists for accounting purposes. Relevant information is in Appendix 1.

You also need to analyse the information you have gathered about some provisions that might be required. This information is in Appendix 2.

QUESTIONS:

Analyse, providing explanations and showing all workings, the contract in progress in Appendix 1 and:

select the appropriate accounting treatment in relation to Buttercups financial statements for the year ended 31 October 2022; and

prepare any journal entries necessary.

(11 marks)

Analyse the information in Appendix 2 and:

explain, showing all workings, whether a provision is required in Buttercups financial statements for the year ended 31 October 2022; and

prepare, showing all workings, any journal entries necessary.

(9 marks)

(20 marks)

Note:

1. Ignore taxation.

APPENDIX 1 (SECTION 4)

Contract in progress at 31 October 2022

Under the terms of the contract in question, Buttercup is constructing a new retail park for its customer Snowdrop-Primrose Holdings plc (Snowdrop). The construction commenced in January 2022 and, under the terms of the contract, construction is to be completed by the end of December 2023.

Snowdrop controls the retail park during its construction. The contract price and payment terms have been agreed and there is no concern regarding Snowdrops ability to pay. Details of the contract are as follows:

The contract was negotiated at a price of 24,000,000 in December 2021. A penalty of 160,000 will apply if the factory is not finished by 31 December 2023. At 31 October 2022, the site manager has informed you that delays caused by bad weather will mean it is unlikely that the contract will be completed before January 2024.

Any directly-related costs occurring once the construction has commenced are recoverable within the terms of the contract. None of the costs incurred to date relate to future performance obligations.

Stage of completion is recognised based on costs incurred to date compared to total expected costs of the contract. All costs incurred are invoiced on a 30-day credit term.

Other information is as follows:

	Notes	000
Costs incurred to 31 October 2022:
Professional fees	(a)	300
Direct materials costs		5,760
Direct labour costs		3,634
Wastage of materials	(b)	437
Depreciation charge on plant and equipment used on site _		452
Administrative costs	(c)	276
Included within Cost of sales		10,859
Expected allowable costs to complete		14,300
Amounts invoiced to Snowdrop by 31 October 2022	(d)	9,600

APPENDIX 1 (SECTION 4) continued

Notes:

The professional fees were incurred in November 2021 and related to the preparation of Buttercups bid for the contract.

The wastage of materials occurred when tarmac for a section of the retail park had to be dug up and re-laid due to the colour used not being what was specified in the contract.

It is stated within the contract that Administrative costs related to the contract are fully recoverable.

The amounts invoiced to Snowdrop were debited to Trade receivables and credited to Revenue.