Segmented construction contract
On 1 January 2013, entity A entered into a contract to construct a building on a piece of land it has acquired and, when construction is complete, to deliver the entire property to a customer. A applies the percentage of completion method to account for contract revenues and expenses. The relative percentage of cost incurred is considered a reliable method for measuring the progress of the contract.
Construction has commenced and at the end of the reporting period (31 December 2013) total construction costs incurred amount to €2m.
Entity A considers that the amount of revenue in the contract attributable to the construction is €8.5m and the amount to the sale of land is €2.5m.
The percentage completion of the construction contract is 25% – calculated as €2m costs incurred as a proportion of the €8m estimated total cost of construction.
Accordingly, as at 31 December 2013 the following amounts are recorded:
|
Revenue |
(€8.5m >c 25%) |
€2.13m |
|
Contract expense |
€2.00m |
|
|
Gross amount due from customer |
(Revenue of €2.13m) |
€2.13m |
|
Inventory |
(Cost of the land) |
€2.00m |
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