Question

Indiana Co. began a construction project in 2018 with a contract price of $161 million to be received when the project is completed in 2020. During 2018, Indiana incurred $40 million of costs and estimates an additional $82 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.
a. Recognized no gross profit or loss on the project in 2018.
b. Recognized $12.37 million gross profit on the project in 2018.
c. Recognized $78.00 million loss on the project in 2018.
d. Recognized $3900 million loss on the project in 2018.

Answer 1

Answer:

b. Recognized $12.37 million gross profit on the project in 2018.

Explanation:

IFRS-15 that deals with Revenue from Construction Contracts requires companies to follow a 4-step approach to record entries for contract when the performance obligation is satisfied over a period of time. These steps are:

1) Calculate the overall profit

Contract Price - Total Costs ( Incurred + Estimated)

⇒ 161 - 122 (40 + 82) = $39 million.

2) Determine the progress of the contract

(Cost to date / Total cost) * 100

⇒ (40 / 122) * 100 = 32.79%

3) Statement of Profit or Loss (If Profitable)

Revenue (Total Price * Progress) ; (161 * .3279)                            $52.79

Cost of Sale (Total costs * Progress) ; (122 * .3279)                      (40)

Gross Profit                                                                                    $12.79

The difference arises of $.42 million is because of rounding, ignore it. We choose the closest option in MCQs, always remember this.

Note: Step 4 is related to Balance Sheet which is not the requirement of this question, so skipped.

Thanks!