(i) Linnet is a large public listed company involved in the construction industry. Accounting standards normally require construction contracts to be accounted for using the percentage-(stage)-of-completion basis. However, under certain circumstances they should be accounted for using the completed-contracts basis.
Required:
Discuss the principles that underlie each of the two methods and describe the circumstances in which their use is appropriate.
(ii) Linnet is part way through a contract to build a new football stadium at a contracted price of $300 million. Details of the progress of this contract at 1 April 2003 are shown below:
$ million
Cumulative sales revenue invoiced........................150
Cumulative cost of sales to date...........................112
Profit to date...................................................38
The following information has been extracted from the accounting records at 31 March 2004:
$ million
Total progress payment received for work certified at 29 February 2004.......180
Total costs incurred to date (excluding rectification costs below)................195
Rectification costs........................................................................17
Linnet has received progress payments of 90% of the work certified at 29 February 2004. Linnet's surveyor has estimated the sales value of the further work completed during March 2004 as $20 million.
At 31 March 2004, the estimated remaining costs to complete the contract were $45 million. The rectification costs are the costs incurred in widening access roads to the stadium. This was the result of an error by Linnet's architect when he made his initial drawings. Linnet calculates the percentage of completion of its contracts as the proportion of sales value earned to date compared to the contract price. All estimates can be taken as being reliable.
Required:
Prepare extracts of the financial statements for Linnet for the above contract for the year to 31 March 2004.