Question

Indiana Co. began a construction project in 2016 with a contract price of $150 million to be received when the project is completed in 2018. During 2016, Indiana incurred $36 million of costs and estimates an additional $84 million of costs to complete the project. Indiana recognizes revenue over time and for this project recognizes revenue over time according to the percentage of the project that has been completed. Indiana:_________
A. Recognized no gross profit or loss on the project in 2016.
B. Recognized $6 million loss on the project in 2016.
C. Recognized $9 million gross profit on the project in 2016.
D. Recognized $36 million loss on the project in 2016.

Answer 1

Answer:

The correct option is C. Recognize $9 million Gross Profit in 2016.

Explanation:

IFRS-15 states that a 4-step approach should be followed when the performance obligation is satisfied over a period of Time. In-this case, the performance obligation will be satisfied within three years from 2016 to 2018.

4-step Approach:

1) First of all you have to calculate the over gain/loss of the project, and the result will decide the entries to be made. In this case, the contract price is $150m and the total costs (Costs incurred + Expected Costs) are $120m. This gives us a Profit of $30m.

2) In the second step, we have to determine the progress of the contract, It means that how much work have we done so far. There are two methods to calculate the progress: Input Method and the Output Method. Based on the data available, we will go for Input Method. To calculate progress under this method, simply divide the costs incurred by the total costs and multiply the result with 100 to get the percentage. 30% is the progress of the contract.

3) Revenue (150 * 30%) = $45m

   COS (120 * 30%)        = $36m

   Gross Profit                = $9m

* 120 is the Total Cost.

4) The last step involves determining Contract Assets and Liabilities. I won't go in to the detail because this step is not concerned with your question. You are open to ask questions regarding this step if you need.

Thanks.