Question 5

In 20X7, D&D Construction Corp. (D&D) successfully bid on a project with the Acadia Recreation Authority (Acadia) to build a regional recreation centre that includes an Olympicsized swimming pool, a gym with weight-training facilities, a running track, and two multi-use rooms for meetings and other events. Construction began in August 20X7. The latest completion date permitted is June 15, 20X8. The fixed value of the contract is $6,358,000. At this price, D&D expects to earn a profit of $578,000 on the project. A performance bonus is available for completing the project early, according to the following schedule. Project completion is considered a single performance obligation that will be satisfied over time.

Costs incurred to December 31, 20X7, totalled $2,918,900 and were debited to the contract asset account in the normal manner. Total budgeted costs for the project remain unchanged at $5,780,000. Management remains confident that the project will be completed on time and the estimated probabilities of completion are still valid.'

D&D reports its financial results in accordance with IFRS. Its year end is December 31. It uses the cost-to-cost method to determine construction revenue and the most likely amount in determining the transaction price of the contract.

On December 29, 20X7, in accordance with the contract, D&D billed Acadia $3,500,000 for work completed to date. This was the first time D&D invoiced Acadia for this project.

Required:

a) Prepare the journal entry to record the interim billing on December 29, 20X7.

b) Calculate the variable consideration and determine the transaction price including the variable consideration.

c) Prepare the journal entry to record revenue for the year ended December 31, 20X7, on this project.

d) Prepare extracts from D&D’s statement of financial position as at December 31, 20X7, reporting all construction-related asset and liability accounts in the prescribed manner. Make sure that you clearly indicate how the various accounts are classified (current or longterm; asset or liability).

e) In part (d) you will have reported either a net asset or net liability pertaining to contract assets and billings. Briefly explain what the reported number represents. Be succinct — one short paragraph is sufficient.

Prep-IF1-ASN02