Question

A contractor at the end of its s second year working on a contract finds that...

A contractor at the end of its s second year working on a contract finds that the total estimated cost of the contract ($600,000) exceeds the contract price ($550,000). At the end of the first year of the contract, $20,000 of gross profit was recognized. The percentage of completion at the end of year 2 is 40%. What amount of loss is recognized for the second year?

20,000

50,000

70,000

40,000

10,000

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Homework Answers

Answer #1

Given that

Total contact price $550000

Percentage completed as on last day of 2nd year is 40%

Profit recognised in 1st year $20000 has no relevance for 2nd year.

As per IFRS, in case, if contractors estimated contract cost exceeds the contract price, then recognise the whole probable loss in year of estimated.

Means, in the given sum, contractors estimated cost of contract $600000 exceeds the contract price of $550000 at the end of 2nd year.So as per IFRS, he needs to recognise whole loss I.e., $600000-$550000=$50000 in the 2nd year itself irrespective of percentage of completion.

Amount of loss recognized in 2nd year is $50000.

Thank you.

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