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a company is engaged in a construction contract with an expected sales value of poun 612450

Determination of revenue

A company is engaged in a construction contract with an expected sales value of £10,000. It is the end of the accounting period during which the company commenced work on this contract and it needs to compute the amount of revenue to be reflected in the profit and loss account for this contract.

Scenario (i) Stage of completion is measured by the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs

The company has incurred and applied costs of £4,000. £3,000 is the best estimate of costs to complete. The company should therefore recognise revenue of £5,714, being the appropriate proportion of total contract value, and computed thus:

4000/7000*10000=5714

Scenario (ii) Stage of completion is measured by surveys of work performed

An independent surveyor has certified that at the period-end the contract is 55% complete and that the company is entitled to apply for cumulative progress payments of £5,225 (after a 5% retention). In this case the company would record revenue of £5,500 being the sales value of the work done. (If it is anticipated that rectification work will have to be carried out to secure the release of the retention money then this should be taken into account in computing the stage of completion – but the fact that there is retention of an amount does not, in itself, directly impact the amount of revenue to be recorded.)

Scenario (iii) Stage of completion is measured by completion of a physical proportion of the contract work

The company’s best estimate of the physical proportion of the work it has completed is that it is 60% complete. The value of the work done and, therefore, the revenue to be recognised is £6,000.

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