Reference no: EM133690

Question :

Kee huat steel constructor managed to safe a fixed price contract from resort Sentosa to build a roller-coaster ride for its ride for its theme park. The project would last three years and the original amount of revenue agreed in the contract was $12 million. The in initial expected cost of the contract was $9 million. The construction agreement also provides Resort Sentosa the option to demand Kee Huat to build another similar ride at the same theme park at the same construction price as per the tender.

When construction started, there was an unforeseen rise in the price of steel and the evaluate of contract costs increased to $10 million. In the second year, Kee huat negotiated worth Resort Sentosa and a variation of $ =1 million raise in the contract revenue was agreed upon. Kee Haut uses the percentage of completion technique for its construction contracts.

The subsequent data relates to the project:

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                                                             Year 1                      Year 2                  Year 3

                                                            ($'000)                      ($'000)               ($'000)

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Initial revenue                                12,000                        12,000                 12,000

Variation -                                       1,000                          1,000

Total contract revenue                     12,000                        13,000                  13,000

Costs for the year                           3, 500 4,                    000 2,                    500

Costs incurred to date                     3,500 7,                     500 10,                 000

Estimated costs to complete            6,500                          2,500 -

Progress billings during the year      4,000                        5,000                      4,000

Cash collected during the year        3,500                       5,000                      4,500

Required:

(a) Evaluate the gross profits to be identifies for each of the three years.

(b)  If the outcome of the construction contract can't be reliably estimated, evaluate the gross profit for each year be?

(c) Assume that soon after Kee Huat has commenced the construction work, Resort Sentosa exercises the option, within the agreed time period limit, requesting Kee Huat to prepare the additional roller-coaster ride at the same construction price as per the tender. Evaluate whether Kee Huat should treat the construction of the first roller-coaster ride and the additional roller-coaster ride as divide construction contracts or a single construction contract.