Construction Changes & Modifications

A shipbuilding company has a $$50$ million fixed$-$price contract that is $40\%$ complete. The customer approaches the company requesting significant design modifications that will increase the project cost by an estimated $$8$ million.

After negotiations, the customer agrees to increase the contract price by $$6$ million. The company expects that an additional $$1$ million of the cost increase can be absorbed by efficiency gains.

Tasks:

Determine whether the change is treated as a separate contract or a modification to the existing one. Explain the key criteria.

Assuming it's a modification, use the appropriate method $($cumulative catch$-$up or prospective$)$ to adjust revenue, costs, and profit recognized to date.

Calculate revised estimated total profits on the contract and prepare any necessary journal entries.

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