construction contract - lets see how much you know

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construction contract - lets see how much you know - insaan - 06-03-2006

Asalaam o alaikum

I have a question regarding construction accounting

In the B/S

W.I.P = costs incurred to date + profit recognized i.e. charged 2 P/L (this is zuberiâs treatment)
Or
W.I.P=value of work certified + cost of work uncertified (this is our acc. Teacher's treatment)

Yes W.I.P may be the same in both cases But what is the right treatment?
Plz give answer n back up with logical reasoning

- Abdur.Rehman - 06-03-2006

There are two methods of determining contract revenue and contract WIP
1)Cost to date method
2)Value of work certified method

in cost to date method u first determine stage of completion by dividing cost to date by total estimated contract cost and recognise revenue on its basis. it is usually common in cost plus contracts.

and in value of work certified method u book the revenue on the basis of work certified. It is usually common in fixed price contracts.

So the working out of contract WIP depends upon which contract u r dealing with i.e. fixed price or cost plus, or u can say which method u have adopted to determine contract revenues.

In the first treatment given by u, the profit recognised is worked out by applying a %age on the basis of cost to date. So it seems a cost plus cotract.
and in the second treatment, the profit is already included in the value of work certified plus the cost of work uncertified who's revenue will be recovered once that part of work is certified. and it seems to be a fixed price contract.
u may be able to apply both treatments on same question theoratically but practically its not the case.
Both treatments are correct, its just the type of contract u r dealing with.

and plz do not use in the subject words "lets c how much u know" in future. and if its like that i can put u many a more questions u may not b able to answer.

- insaan - 06-04-2006

Ohh.. I feel my question was a bit vague
Let me elaborate with an example
A. the contract is fixed price contract
B. according to companyâs policy certification of work has prime importance in computing interim profits on a contract in progress

Contract price = Rs.750000
Work certified = Rs. 487500
Cost to date = Rs.470000
Further estimated expenditure = Rs.227000
Solution
Total estimated profit on this contract = 750000-697000=Rs.53000
Profit to be credited to P/L = 53000*(487500/750000) =Rs.34450

Now
W.I.P = 487500 â¦â¦â¦â¦ (1)
Or
W.I.P = 470000+34450 =504450 â¦â¦â¦. (2)

According 2 javed zuberi W.I.P = Rs.504450 and he would treat the work certified figure as progress billing and the balance i.e. Rs 16950 as due from customer
Whereas according to our teacher W.I.P = Rs 487500

Here, which treatment is correct and why?

- Ali Akbar - 06-04-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan
 Ohh.. I feel my question was a bit vague
Let me elaborate with an example
A. the contract is fixed price contract
B. according to companyâs policy certification of work has prime importance in computing interim profits on a contract in progress

Contract price = Rs.750000
Work certified = Rs. 487500
Cost to date = Rs.470000
Further estimated expenditure = Rs.227000
Solution
Total estimated profit on this contract = 750000-697000=Rs.53000
Profit to be credited to P/L = 53000*(487500/750000) =Rs.34450

Now
W.I.P = 487500 â¦â¦â¦â¦ (1)
Or
W.I.P = 470000+34450 =504450 â¦â¦â¦. (2)

According 2 javed zuberi W.I.P = Rs.504450 and he would treat the work certified figure as progress billing and the balance i.e. Rs 16950 as due from customer
Whereas according to our teacher W.I.P = Rs 487500

Here, which treatment is correct and why?

<hr height="1" noshade id="quote"></blockquote id="quote">

Ok.

According to para 27 of IAS 11 the two names i.e 'amount due from customer' & 'WIP' may be alternatively used for same purpose by users of IAS.

And the amount due from customers/WIP can be worked out as follows

Cost incurred (Actual cost, and it may include the cost of unconsumed material and uncertified work)
Add/(less) recognized profits/losses
Less progress billings

So in ur example, the value of amount due from customer is

Cost incurred to date (470,000)+profits recognized (34,450)-progress billings, if any.

So the WIP and amount due from customers are not two separate terms.

ICAPians, the unparalleled..

- insaan - 06-04-2006

thx 4 correction
i just came 2 know that W.I.P & amt due are same thing

few more things

1.in the P/L
revenue to be charged to P/L would be work certified
profit to be charged to P/L would be calculated figure
and costs to be charged to P/L would be thier balancing figure

and

2.in the B/S
W.I.P=Cost incurred (Actual cost, and it may include the cost of unconsumed material and uncertified work)Add/(less) recognized profits/losses Less progress billings

3.contract A/C asked by the examiner is the W.I.P A/C

i m just asking these to confirm what i have concluded from construction contract.... i might be at mistake ..so plz correct me if there is any

- Ali Akbar - 06-04-2006

Yes you are right.

Cost taken to P&L shall be the balancing figure of revenue and profits taken to P&L under the work certified method.

In the balance sheet usually the terminology of WIP is not used rather 'amount due from customer' is more appropriate and the amount shall be calculated in the same way as earlier stated.

And if the examiner require WIP A/C, then you will have to prepare T account of WIP in which on the debit side the following heads usually appear
Material, labour, other over heads chargeable to contract, recognized profit (i.e GP) etc
and on the credit side following heads usually appear
progress billings(the debit of it goes 1st to progress billing A/C and then to Accounts Receivable A/C, so there is a difference b/w accounts receivable and amount due from customers a/c, the latter may be sometimes called unbilled revenue, whereas the former is the billed revenue) and the carried forward balance of WIP which shall be made up of unconsumed machinery/material(i.e cost of uncertified work).

Hope this will help you out.

ICAPians, the unparalleled..

- insaan - 06-05-2006

AOA,
Gr8
Every time u reply I get a new thing
This time the difference between amt. due from customer and A/C receivable
Hope that u will continue contributing like this...

Let me share my experience here. When I was an actuarial student and preparing 4 exam P at that time I came to know the true worth of professional forums.
www.actuarialoutpost.com is the actuarial discussion forum and itâs so impressive, helpful in each and every aspect
believe me , how I prepared 4 my exam P , It went on like I am studying my exam P book and I faced a problem. Just what was required was to post that problem on the forum and there came bundles of answer w.r.t the question and the people answering were not only the students, they included teachers, actuaries, consultants and many more. About 2 to 3 of most senior members were all FSAs, working in the industry 4 last 30 yrs, earning in 6 figures in dollars and just contributing in the forums for the sake of students. Whether the question be complex or a simple one

But when I finally chose CA as my career I was always in search of such a forum. I found this forum but It doesnât compete an inch with that forum... This forum really needs members like u...Thx for Ur contribution and keep on contributing...Dont think I am flattering u... I m just quoting the facts

Mr.Abdur Rehman said
âAnd plz do not use in the subject words "lets c how much u know" in future. and if its like that i can put u many a more questions u may not b able to answer.â
My only purpose to use such a subject was only to get an answer B/C what the problem with us is that we know a lot , really, BUT we say âWhat I know is mine , why should I share with anybody else.â so I thought that in this way I might get an answer & it worked
And Mr Abdur Rehman if u know and u know as ur reply speaks , then why not share it with others

Hope that all forum members would contribute constructively, specially regarding such queries which can only be answered by professionals..Fazoool general discussion to her koi ker sakta hai or kernee bhee chaheeain but along with some constructive stuff

TC
CU
ALLAH HAFIZ

- Ali Akbar - 06-05-2006

<blockquote id="quote">quote<hr height="1" noshade id="quote">Originally posted by insaan

Hope that all forum members would contribute constructively, specially regarding such queries which can only be answered by professionals..Fazoool general discussion to her koi ker sakta hai or kernee bhee chaheeain but along with some constructive stuff

<hr height="1" noshade id="quote"></blockquote id="quote">

I think you have praised me much more than what I deserve, nevertheless, I respect your sentiments.

And as far as Abdur.Rehman is concerned he is not the one who doesnt want to share his knowledge. This was I think misunderstanding.

And if you feel any further difficulty especially in Accounting & Tax please free to ask. We will inshAllah surely help you, and please make it sure this forum is not only for general discussions in which certain members take keen interest!

And this is an open message to all members that if you feel any difficulty in profession related topics/issues please feel free to ask we will help you to the best of our abilities.

ICAPians, the unparalleled..

- waqas_rehman20 - 01-03-2011

Dear All PK forum contributors,

thanx 4 ur efforts

Mr. Insaan u r true there is no forum like this.

- Ali Akbar - 06-07-2011

Hey,

logged in today after long time, was just going through old posts..enjoyed..how you doing? I hope you are done with studies and hopefully now CA..