Page 58 - SBR Integrated Workbook STUDENT S18-J19

Chapter 4

Example 6

Construction

Amos enters into a contract with Lucas to construct a building. Construction
started on 1 October 20X1. The contract price was agreed at $4 million, plus a
bonus of $1 million that would be payable if construction is completed by 30
September 20X2. The building has been designed especially for Lucas and
could not be sold to another entity without significant modifications. Although
Amos believes that it is more likely than not that it will meet the bonus criteria,
it has some doubt due to the unique nature of this particular project. The terms
of the contract specify that Lucas must pay Amos within 30 days of the end of
each quarter based on the progress of construction as at the end of each
quarter. Amos measures progress to completion in terms of the contract costs
incurred as a proportion of total estimated contract costs. Total contract costs
are estimated at $2.5 million. If Lucas cancels the contract, then it is liable to
pay Amos for the work completed.

By 31 December 20X1, Amos has incurred costs of $0.5 million on the
contract. The estimate of total contract costs remains unchanged. Although
progress on the contract has been satisfactory, there are still doubts about
whether the $1 million bonus will be received.

Explain how Amos should account for the above in the year ended 31
December 20X1.

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