IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

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Wiley IFRS: Practical Implementation Guide and Workbook

I\IULTIPLE·CHOICE QUESTIONS 1. Lazy Builders Inc. has incurred the following contract costs in the first year on a two-year fixed price contract for $4.0 million to construct a bridge: • Material cost = $2 million Other contract costs (including site labor cos ts) = $ 1 million Cost to comp lete = $2 million How much profit or loss should Lazy Inc. recognize in the first year of the three-year construction con– tract? (a) Loss of $0.5 million prorated over two years. (b) Loss of $1.0 million (expensed immedi– ately). (c) No profit or loss in the first year and defer– ring it to second year. (d) Since 60% is the percentage of completion, recognize 60% of loss (i.e.• $0.6 million). Answer : (b) 2. Brill iant Inc. is constructing a skysc raper in the heart of town and has signed a fixed price two-year contract for $21.0 million with the local authorities. It has incurred the followi ng cost relating to the contract by the end of first year: Material cost = $5 million • Labor cost = $2 million Construction overhead = $2 million • Marketing costs = $0.5 million • Depreciation of idle plant and equipment = $0.5 million At the end of the first year. it has estimated cost to complete the contract = $9 million. What profit or loss from the contract should Brilliant Inc. recognize at the end of the first year? Mediocre Inc. has entered into a very profitable fixed price contract for constructing a high-rise building over a period of three years. It incurs the following costs relating to the contract during the first year: • Cost of material = $2.5 million Site labor costs = $2.0 million Agreed administrative costs as per contract to be reimbursed by the customer = $ 1 million Depreciation of the plant used for the construc– tion = $0.5 million • Marketing costs for selling apartments when they are ready = $ 1.0 million Tota l estimated cost of the projec t = $ I8 million The percentage of comp letion of this contract at the yea r-end is (a) $ 1.5 million (9/ 18 x 3.0) (b) $1.0 million (9/ 18 x 2.0) (c) $1.05 million (10/19 x 2.0) (d) $1.28 million (9.5/18.5 x 2.5) Answer : (a) 3.

(c) 25% (= 4.5/18.0) (d) 39% (= 7.0/ 18)

Answe r : (a ) 4. A construction company IS In the middle of a two-year construction contract when it receives a letter from the custome r extendi ng the contract by a year and requiring the construction company to in– crease its output in proportion of the number of years of the new contract to the previous contract period. This is allowed in recognizing additional revenue according to lAS I I if (a) Nego tiations have reached an advanced stage and it is probable that the customer will accept the claim. (b) The contract is sufficiently advanced and it is probable that the specified performan ce standards will be exceeded or met. (c) It is probable that the customer will approve the variation and the amount of revenue arising from the variation. and the amount of revenue can be reliably measured. (d) It is probable that the customer will approve Answer : (c) S. A construction compa ny signed a contract to build a theater over a period of two years, and with this contract also signed a maintenance contract for five years. Both the contracts are negotiated as a sin– gle package and are close ly interrelated to each other. The two contracts should be (a) Combined and treated as a single contrac t. (b) Segmented and considered two separate contracts. (c) Recognized under the completed contracted method. (d) Treated differently-the building contract the variation and the amount of revenue arising from the variation. whether the amount of revenue can be reliably measured or not.

under the completed contract method and maintenance contract under the percentage of completion method.

Answer : (a)

(a) 50% (= 6.0/18.0) (b) 27% (= 4.5/16.5)