PRACTICE PROBLEM 3 The Swazy Construction Company has secured a contract with th

Question

PRACTICE PROBLEM 3 The Swazy Construction Company has secured a contract with the Alberta government for the construction of 15 kilometers of highway at a contract price of $125,000 per kilometer. Payments for each kilometer of highway are to be made according to the following schedule: 35% at the time the concrete is poured; 45% when all work on that kilometer is completed; and · 20% when all 15 kilometers of highway have been completed, inspected, and approved. At the end of the first period of operations, 5 kilometers of highway have been entirely completed and approved, concrete has been poured on the second 5-kilometer stretch, and preliminary grading has been done on a third 5-kilometer stretch. The job was originally estimated to cost $100,000 per kilometer. Cost to date have coincided with these original estimates and have totaled the following amounts: on the completed stretch, $100,000 per kilometer; on the second stretch, $80,000 per kilometer; an on the third stretch, $12,500 per kilometer. It is estimated that each unfinished stretch will be completed at the costs originally estimated. Required: How much should the Alberta government have paid Swazy during or at the end of the first period of operation under the terms of the contract? (a) How much income would you report for this period? Assume that Swazy uses the percentage of completion method to account for long-term contracts (b)

Explanation / Answer

Amount payable by Alberta Govt. to Swazy Amount($) 1st Stretch (5kms*$125000*80%) $5,00,000 2nd Stretch (5kms*$125000*35%) $2,18,750 3rd Stretch --- $7,18,750 Income to be reported for the Period Amount($) 1st Stretch (5kms*$100000) $5,00,000 2nd Stretch (5kms*$80000) $4,00,000 3rd Stretch (5kms*$12500) $62,500 Total cost incurred $9,62,500 Precentage of work completed 64.17% ($962500/$150000)*100 Income to be reported for the Period Contract price per Km $1,25,000 No of KM contracted 15 Total estimated revenue $18,75,000 Percentage of work completed 64.17% Income to be recognised for the period under % of completion method $12,03,188

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