We currently have 3 'custom build' contracts in progress at the year end. We have recorded the
Question:
We currently have 3 'custom build' contracts in progress at the year end. We have recorded the total costs incurred in the build of all three bespoke bikes have recorded in the 'Contract Account'. A breakdown of agreed sales price and costs for each contract and amounts invoiced is a follows:
Contract 1 () Agreed sales price 600,000 Cost incurred to date 224,000 Customer invoices - 300,000 (All received)
Contract 2 ()
sales price 500,000 Cost incurred to date306,000 Customer invoices 250,000
Contract 3 ()
sales price 700,000 Cost incurred to date270,000 Customer invoices 350,000
Total () 1,800,000 800,000 900,000
The total amount of costs incurred to 30 September 2023 is 800,000 for all three contracts and
this is the balance included within current assets (under 'Contact assets') in the draft statement of financial position.
The customers have been invoiced for 50% of the agreed contract price for each motorbike and we have accounted for the invoiced amounts as revenue for the year, so a total of 900,000 additional revenue is recognised in this year's profit or loss. I'm not sure that this is the correct treatment as the build of the motorbikes are still in progress so they have not been delivered to the customers.
If you need some further information, we have detailed files on each contract which includes data in respect of the progress made on each contract and expected future costs.
adjustments are made to correct these errors and then the following questions are asked
- Can you explain what this balance comprises and what this new balance on the contract asset account represents?
- Why there seems to have been a partial recognition of sales on each of the custom build bikes.
- is the bikes being a custom product and the fact that the company is a bike manufacturer which indicates work in progress enough to deem this a performance obligation over time
Introduction to Management Science A Modeling and Cases Studies Approach with Spreadsheets
ISBN: 978-0078024061
5th edition
Authors: Frederick S. Hillier, Mark S. Hillier