ANSWER TO TUTORIAL CASE: Beavers plc

As discussed in the tutorial this question is better answered as follows rather than attempting part a
first.
Step 1 Calculate the overall contract result (profit or loss). This indicates an expected overall
profit and therefore allows staged profits to be recognized.

Calculation of profit
Total contract price 240,000
Costs to date
Wages 91,000
Materials 36,000
Other costs 18,000
HO costs (see note below) 6,000
Plant depreciation (12/15 8,000) 6,400
157,400
Estimated further costs to complete
(10,000 + 12,000 3000 inventory included in costs to date
+ 8,000 + 1,600 plant depreciation) 28,600
Estimated total costs to complete 186,000
Estimated total profit 54,000

Recognised profit to 30 June, 20X7 based on certified value of work to date 180,000
180,000/240,000 54,000 = 40,500 (credit to income statement; add to contract asset account)

Step 2 Income statement revenue entry
Cumulative revenue (all related to current year) 180,000
(per certificated and invoiced work to date 75% of total)
This would be included in top line revenue/sales figure in the income statement and charged to Dam
Ltd. They have settled 150,000 so far, and therefore would be shown on the Statement of Financial
Position as owing the outstanding amount of 30,000 to be included in trade receivables

Step 3 Income statement expense entry
Total anticipated costs 186,000
75% of this represents the cost of the proportion of work carried out to date =
139,500
This would be included in the cost of sales figure in the income statement

Income Statement extract

Revenue 180,000
Cost of Sales (this can be calculated as above or here as a balancing figure) 139,500
Gross Profit (as step 1 above) 40,500


Step 4 Calculate Statement of Financial Position items:


Gross amounts due from customers
Costs incurred to date 157,400
Add: recognized profit taken 40,500
Less: invoiced to date (180,000)
17,900

Trade receivables amount o/s from Dam Ltd 30,000
(180,000 invoiced - 150,000 paid)
Non-current assets:
Net book amount of plant on site (9,000-6,400) 2,600

Step 5 The Contract account can then be drawn up as follows:
Contract Account

Wages 91,000
Materials 36,000
Other costs 18,000
HO costs (see note below) 6,000
Plant depreciation (12/15 8,000) 6,400
Total costs to date 157,400 (W-i-p at cost)
Recognised profit 40,500 Transfer benefit to income statement
197,700
Less: Progress billings (180,000)
Work-in-progress c/f 17,900 This is the detailed version of the amount reflected
in the SOFP above.