The table below shows the estimated costs and receipts from customers for a 2-ye
ID: 2729021 • Letter: T
Question
The table below shows the estimated costs and receipts from customers for a 2-year contract. Assume that actual costs and receipts were equal to the estimated amounts.
a.A company follows the percentage-of-completion method to account for its long-term contracts.
b. A company follows the completed-contract method to account for its long-term contracts.
Find Revenue and Expense for both company A and B, filling in the table below for both.
Year 1
Year 2
Total
$40
$60
$100
$50
$200
$250
$250
x
x
$100
Year 1
Year 2
Total
Estimated costs$40
$60
$100
Receipts from customers$50
$200
$250
Revenues x x$250
Expensesx
x
$100
Explanation / Answer
A. Under percentage of completion method expenditure is recognised to the extent incurred and revenue is recognised to the percent of contract completed.
Percent of contract completed = Incurred cost/total cost * 100
Revenue to be recognised = total revenue * percent of contract completed
As per percentage of contract completed method:
Year 1
Year 2
Total
Estimated costs
$40
$60
$100
Receipts from customers
$50
$200
$250
Revenues
$100
(250*40/100)
$150
(250*60/100)
$250
Expenses
$40
$60
$100
B. Under completed contract method the revenues and expenses are deferred to the end of the project. Hence any expense or revenue to be recognised only at the end of the project, the in between revenues collected or expenses are incurred to be shown in Balance as Asset/ Liability.
As per completed contract method:
Year 1
Year 2
Total
Estimated costs
$40
$60
$100
Receipts from customers
$50
$200
$250
Revenues
NIL
$250
$250
Expenses
NIL
$100
$100
Year 1
Year 2
Total
Estimated costs
$40
$60
$100
Receipts from customers
$50
$200
$250
Revenues
$100
(250*40/100)
$150
(250*60/100)
$250
Expenses
$40
$60
$100
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