On 1 May 2018, Safe Structures Limited signed a contract with a customer to build a residential apartment made up of three 4-bedroom flats. The transaction price is ₦360,000. The contract is a single performance obligation. Safe Structures Limited measures progress in fulfilling its performance obligation arising from the contract by measuring costs to date as a share of aggregate anticipated costs.
As at 30 April 2019, the costs incurred to date amounted to ₦102,400. The estimated aggregate anticipated costs to complete the contract are ₦271,400. As at 30 April 2020, the costs borne to date amounted to ₦172,400. The estimated aggregate anticipated cost to complete the contract has not changed.
Assume that the entity is yet to recognise revenue before 30 April 2019. Calculate the amount of revenue that should be recognised for the period ending 30 April 2019 and 30 April 2020 respectively.
See the suggested solution to practice activity 13.34 here.
Suggested solution to practice activity 13.34
Computation of estimated future costs to completion of the contract as at 30 April 2019
₦
Costs to date 102,400
Estimated future costs to complete the contract 169,000
Total estimated costs 271,400
Computation of estimated future costs to completion of the contract as at 30 April 2020
₦
Costs to date 172,400
Estimated future costs to complete the contract 99,000
Estimated future costs to complete the contract 271,400
Revenue for the year ended 30 April 2019 should be recognised as follows:
i. Determine the progress to contract completion for the year ending 30 April 2019.
To determine the progress to contract completion, apply the following:
₦102,400 = y ...... Equation (1)
₦271,400 = 100% ....... Equation (2)
Make y the subject of the formula
10,240,000 = 271,400y
y = 10,240,000/271,400
y = 37.73%
ii. Determine the revenue recognised for the period ending 30 April 2019.
Transaction price of contract is ₦360,000.
Therefore, revenue recognised as at 30 April 2019 is:
₦360,000 * 37.73% = ₦135,828
Revenue for the year ended 30 April 2020 should be recognised as follows:
i. Determine the progress to contract completion for the year ending 30 April 2020.
To determine the progress to contract completion, apply the following:
₦172,400 = y
₦271,400 = 100%
Make y the subject of the formula
17,240,000 = 271,400y
y = 17,240,000/271,400
y = 63.52%
ii. Determine the revenue recognised for the period ending 30 April 2020.
Transaction price of contract is ₦360,000.
Therefore, revenue recognised as at 30 April 2020 is ₦360,000 * 63.52% = ₦228,672.
iii. Determine the revenue recognised in previous periods.
Revenue recognised for the period ending 30 April 2019 = ₦135,828
Before 30 April 2019, revenue had not been recognised.
Cumulative Revenue recognised for the period ending 30 April 2020 = ₦228,672
This cumulative amount comprises:
Revenue recognised in previous period (30 April 2019) ₦135,828
Revenue recognised in the current period (30 April 2020) ₦92,844
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