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Homework answers / question archive / BKAR3063 SPECIALIZED FINANCIAL ACCOUNTING A182 TUTORIAL: CONSTRUCTION CONTRACT   Question 1) On 30 June 2017, Bob the Builer Bhd bid for a construction contract to build road at Timur-Barat highway awarded by the Jabatan Kerja Raya (JKR)

BKAR3063 SPECIALIZED FINANCIAL ACCOUNTING A182 TUTORIAL: CONSTRUCTION CONTRACT   Question 1) On 30 June 2017, Bob the Builer Bhd bid for a construction contract to build road at Timur-Barat highway awarded by the Jabatan Kerja Raya (JKR)

Accounting

BKAR3063 SPECIALIZED FINANCIAL ACCOUNTING A182

TUTORIAL: CONSTRUCTION CONTRACT

 

Question 1)

On 30 June 2017, Bob the Builer Bhd bid for a construction contract to build road at Timur-Barat highway awarded by the Jabatan Kerja Raya (JKR). The bid cost is RM5,000. On 1 January 2018, the company successfully secure the contract and sign up the agreement with JKR. The 5-year contract is worth RM50 million. It is estimated that the total cost of the construction project is RM40 million.

In the contract, it is stated that there might be additional work of scope. This change of order may vary around 10% of the fixed contract price. The company has a long history of performing this type of highway work with JKR. Based on its past experience, it is 90% likely that JKR may request the company to add more job scope worth 5% of the fixed contract price.

Required:

  1. Explain how the contractor should account for the bid cost.

 

  1. Explain how the contractor should account for the change of order.

 

Question 2

Tekun Bhd has been assigned a contract by the Bagus Holdings to design and build a building for a price of RM1,000,000. The initial estimate of contract costs is RM700,000. The project will take three years to complete the project.

During the first year, the company incurred actual cost of RM300,000 to perform the construction project. By the end of the first year, the contractor’s estimate of total contract costs has increased to RM740,000, due to increase in the price of raw material and labour cost.

In the second year, Bagus Holdings approved a change in order or variation in the contract involving additional specification to be built in the building. This variation resulting in an increase in contract revenue of RM20,000. During the same year, the company incurred actual costs of RM400,000, including wastage of RM10,000 raw materials. It is estimated that another RM120,000 is needed to complete the project in the following year.

The company determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date relative to the latest estimated total costs.

The company has submitted the progress billings to JKR as below:

            End of first year                                  50%

            End of second year                             80%

 

REQUIRED:

 

  1. Calculate the stage of completion of that construction contract in the first and second year.

 

  1. Calculate the amount of revenue, expenses and profit to be recognized in the first and second year.

 

  1. Determine the amount due from (or to) customer on contract in the first and second year.

 

Question 3

MUDAH Construction Bhd. is a contractor for the construction of office buildings in Jerteh. At the beginning of the year 2012, the company began constructing 3 different buildings at different places. The following data describes the status of these building at the end of year 2012.

                                                                                    A1                   A2                   A3

Contract Price (RM’000)                                4,000               9,000               13,150

Costs incurred to date (RM’000)                    2,070               6,318               3,000

Estimated Costs to complete (RM’000)         1,380              1,782              9,000

During the year 2013, the company incurred the following costs for particular building:

A1                   RM930,000 (estimated costs to complete RM750,000)

A2                   RM1,800,000 (Job were completed)

A3                   RM7,400,000 (estimated costs to complete RM2,800,000)

Required:

  1. Calculate the stage of completion of for all construction contracts above for both year 2012 and 2013. Assume the company practice the cost-to-costs percentage of completion method.

 

  1. calculate the total revenues, total costs and gross profit for the year 2012 and 2013.

 

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