Facts
In year 1, Slow Build Inc. was invited to tender for the construction of a residential block and connected shopping arcade with common plaza and garden and play areas. Tenders were required to detail the costs of each element separately, but it was clear that only one contractor would win the entire contract due to the interrelated aspects of the development.
During year 1, Slow Build Inc. management traveled to the United States to visit three possible designers in order to obtain their preliminary design proposals, of which only one would be selected. The cost of the visit was $20,000. Later in year 1, having selected one designer, Slow Build Inc. returned to the United States to clarify design details and request construction of a scale model in order to make a presentation of the tender to the ultimate customer. The cost of the second trip was $15,000.
During year 2, but before its year 1 financial statements were authorized for issue, Slow Build Inc. was notified that it had been awarded the contract. However, the contract was not signed until after the year 1 financial statements were issued.
The contract was for a total price of $16 million, comprising $9 million for the residential block, $5 million for the shopping arcade, and $2 million for the common plaza, garden, and play area. A mobilization advance of $1 million would be paid at the outset, $1 million was payable at the end of year 2, $5 million at the end of year 3, and $8 million was payable at the end of year 4, at which point the development would be complete and $1 million was to be held back as a retention for one year.
Slow Build Inc. initially estimated that the total cost of the project would be $12 million, of which $7 million would be for the residential block, $4 million for the shopping arcade, and $1 million for the plaza, gardens, and play area. Included in this cost is $1 million of plant acquired specifically for the project that could not be used subsequently. The estimated residual value of this plant at the end of the contract was $100,000. Also included in the overall cost was 30 months of depreciation on general plant and equipment already owned by Slow Build Inc. at $50,000 per month. The on site accounts staff cost included in the estimate was $5,000 per month. Their role was to maintain and record time cards of workers and receive and issue materials.
Costs incurred at each year end were
|
Year 2 |
Year 3 |
Year 4 |
Total |
|
|
Residential block |
1,000,000 |
3,000,000 |
3000000 |
$7000000 |
|
Shopping arcade |
$500,000 |
1,800,000 |
1,700,000 |
4,000,000 |
|
Plaza, gardens, & play area |
200,000 |
800,000 |
1,000,000 |
|
|
Total |
1,500,000 |
5,000,000 |
5500000 |
$12000000 |
The costs at the end of year 2 include $250,000 of materials delivered to the site for use in year 3.
The $200,000 in year 3 for the plaza, gardens, and play area was an advance to subcontractors who would mobilize in year 4.
During year 3, due to a fire at the neighboring plot, the police cordoned off the whole area for a month while investigations were conducted. During this time all plant and equipment remained idle on site. However, work continued in Slow Build Inc.’s workshop and yard.
During year 3, the customer requested a variation in the contract with a value of $1 million and a cost of $750,000. However, the variation was not approved by the customer until after Slow Build Inc.’s year 3 financial statements were authorized for issue. Slow Build Inc. incurred the extra costs for the variation in year 3.
Required
Provide Slow Build Inc.’s income statement and the amounts that should be presented in the balance sheet for each of the years 1, 2, 3 and 4.