Exercises on Accounting for Construction Contracts

1. A fixed price contract valued at 1000 with estimated total costs of 900 was being executed by a firm over a period of 3 years. At the end of the first year, the costs till date were 360 and estimated costs to complete were 540. However, at the end of the second year, the costs till date were 770 and estimated cots to complete were 330. Assume % completion based on proportion of costs-to-date to total estimated costs. Assuming that the project was completed as per the above data, compute the profit/loss during each of the three years.

2. A firm started the business with 10,000 of cash by way of capital. It executed a fixed price contract valued at 10,000 with originally estimated total costs of 8000. The firm used physical progress as a basis for computing % completion. Assume that physical progress at the end of the first year was 45% and the cumulative progress at the end of the second year was 80%.

First Year: costs incurred till date = 4000, balance cost to complete= 4000, billings at the end of the year = 4000 with credit period = 30 days Second Year: costs incurred till date = 6750, balance cost to complete =2250, billings at the end of the year = 4000 with credit period = 30 days Third Year: The project was completed at the end of the year with costs incurred till date = 9000, billings at the end of the year = 2000 with credit period = 30 days

Prepare income statement for each of the years and the balance sheet at the end of each of the years.