BHMS$3218$ Intermediate Accounting $1$

$2024/25$ S $2$

Question $2(50$ marks$)$

STAR Corporation $("$STAR$")$ has obtained a fixed price contract from MOON Limited $("$MOON$")$ for $$20,000$ million to build a toll road between City A and City B$.$ The initial amount of revenue agreed in the contract is $$20,000$ million. STAR's initial estimate of contract costs is $$15,500$ million. It will take three years to build the toll road. By the end of Year $1,$ STAR's estimate of contract costs has increased to $$15,800$ million.

In year $2,$ MOON approves a variation resulting in an increase in contract revenue of $$600$ million and estimated additional contract costs of $$560$ million. At the year end of Year $2,$ costs incurred include $$300$ million for standard materials stored at the site to be used in Year $3$ to complete the project.

STAR determines the stage of completion of the contract by calculating the proportion that contract costs incurred for work performed to date bear to the latest estimated total contract costs. A summary of the financial data during the construction period is as follows:

$\backslash$table$[[,\backslash$table$[[$Year $1],[($$ million$)]],\backslash$table$[[$Year $2],[($ $ million$)]],\backslash$table$[[$Year $3],[($ $ million$)]]],[$Initial amount of revenue agreed in contract,$20,000,20,000,20,000],[$variation$,0,600,600],[$Total contract revenue,$20,000,20,600,20,600],[$Contract costs incurred to date,$5,800,11,000,16,360],[$Contract costs to complete,$10,000,5,360,0],[$Total estimated contract costs,$15,800,16,360,16,360],[$Estimated profit,$4,200,4,240,4,240]]$

Required $($Note: marks will be given to detailed workings and good presentation$)$:

$($a$)$ Determine the stage of completion of the contract by the end of Years $1,2,$ and $3$ by using the following table:

$\backslash$table$[[,\backslash$table$[[$Year $1],[($$ million$)]],\backslash$table$[[$Year $2],[($$ million$)]],\backslash$table$[[$Year $3],[($ $ million$)]]],[$Contract costs incurred to date,,,$],[$Contract costs to complete,,,$],[$Total estimated contract costs,,,$],[$Stage of completion,,,$]]$

$(13$ marks$)$

$($b$)$ Compute the amounts $($in $2$ decimal places$)$ of revenue, expense, and profit recognized in the statement of comprehensive income for each of Years $1,2,$ and $3$ using the percentage of completion method $($prepare in $2$ decimal places$)$ by using the following table:$5$ of $5$

$\backslash$table$[[,\backslash$table$[[$To Date$],[($$ million$)]],\backslash$table$[[$Recognized$],[$in prior years$],[($$ million$)]],\backslash$table$[[$Recognized$],[$in current$],[$years$],[($$ million$)]]],[$Year $1,,,],[,,,],[$Year $2,,,],[,,,],[$Year $3,,,],[,,,]]$

$(29$ marks$)$

$($c$)$ Prepare journal entries to account for the contract revenue and expenses for Year $1($prepare in the nearest dollar$).$

$(8$ marks$)$

$-$End of Assignment$-$