MR Limited commences construction of a wave-making machine on 1 July 2014 for Merewether Limited. It signs a fixed-price contract for total revenues of $20 million. The project is expected to be completed by the end of 2017. The expected total cost, as estimated at the commencement of construction, is $16 million. The expected costs to complete a construction project can change throughout the project (in this example, they do). The following data relates to the project:

Font ited States) Workshop Example 1 MR Limited commences construction of a wave-making machine on 1 July 2014 for Merewether Limited. It signs a fixed-price contract for total revenues of $20 million. The project is expected to be completed by the end of 2017. The expected total cost, as estimated at the commencement of construction, is $16 million. The expected costs to complete a construction project can change throughout the project (in this example, they do). The following data relates to the project: Costs for the year Costs incurred to date Estimated costs to complete Progress billings during the year Cash collected during the year 4 2015 (8000) 4 000 4 000 12 000 Accessibility: Investigate 4 500 3 500 2016 ($000) 8 000 12 000 5 000 8 500 7 500 2017(8000) 5.500 17 500 REQUIRED (a) Calculate the income recognised each year. (b) Provide the journal entries for each year, assuming that stage of completion and the outcome of the construction contract can be reliably estimated. (c) Prepare the Statement of Financial Position for 2015 and 2016 7.000 9.000 83 a) Estimated costs to complete Progress billings during the year Cash collected during the year Contract price less Estimated cost: Costs to date Estimated costs to complete Estimated total cost Estimated total gross profit Percentage complete (%) Gross profit recognised in: Accessibility: Investigate 12 000 4.500 3 500 REQUIRED (a) Calculate the income recognised each year. (b) Provide the journal entries for each year, assuming that stage of completion and the outcome of the construction contract can be reliably estimated. (c) Prepare the Statement of Financial Position for 2015 and 2016 Et 5 000 8 500 7 500 2015 ($000) 20 000 SAMSUNG O 7 000 9 000 2016 ($000) 20 000 W TALK I 2017 ($000) 20 000 17 500 17 500 2 500 28C EB 4) A Gross profit recognised in: 2015 2016 2017 less Profit already recognised Profit recognised in year $2 500 000 x 100% less Profit already recognised Accessibility: Investigate ($000) $2.500 2118 22 Font Australia) (b) (11 Profit recognised in year Journal entries assuming outcome of construction contract can be reliably estimated. (iii) To record costs incurred: Dr Cr To record amount payable unconditionally by customer: Dr Cr Construction in progress Cash, accounts payable, etc. Accounts receivable Construction in progress To record cash collections: Dr Cash Accounts receivable O Cr Accessibility: Investigate [ 2015 $000 W 2016 $000 TALK 2017 T $000 5500 5500 7000 9000 7000 9000 28C 20 oma 12 A A Aa- abe X X Aaby A Font (iv) Dr Cr S To record periodic income recognised: Dr Construction in progress Construction expenses Revenue from long-term contracts Paragraph Current Assets (c) Prepare the Statement of Financial Position for 2015 and 2016. F Accounts receivable Construction in Progress (contract asset) AaBbCcDd AaBbCcD AaBbCcI A. Teoc q2... 1 Normal 1 Body Text 1 N 2015 $000 2016 $000 382 5500 Styles 23 5882 2017 $000 I Assume the same facts as Workshop Example 1 except MR Ltd cannot reliably estimate the outcome of the construction contract. (ii) (iii) To record costs incurred: Dr Construction in progress Cr Cash, accounts payable To record amount payable unconditionally by customer: (iv) Accounts receivable Construction in progress Dr Cr To record cash collections: Dr Cash Cr Accounts receivable To record periodic income recognised: Dr Construction in progress Dr Construction expenses Accessibility: Investigate HI 2015 $000 4000 4000 4500 4500 3500 3500 JONSER W 2016 $000 8000 8000 8500 8500 7500 P 7500 TALK 2017 $000 5500 5500 7000 7000 9000 9000 28C X, X Font (iv) (vi) du A Dr Cr IS To record periodic income recognised: Dr Construction in progress Dr Construction expenses Cr Revenue from long-term contracts Dr Cr An adjustment to reclassify the balance of the contract asset to a contract liability Paragraph Construction in progress Contract Liability Contract Liability Construction in progress Statement of Financial Position for 2015 and 2016. Current Assets Accounts receivable Current Liabilities Contract Liability 2015 $000 Teoc q2... 2016 $000 1 Normal 1 Body Text 1 No S 2017 $000 Styles I EE