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C Co is a civil engineering company. It started work on two construction projects during the year ended 31 December 20X0. The following figures relate to those projects at the end of the reporting period.
Maryhill bypass
Rottenrow Centre
$'000
Contract price
9,000
8,000
Costs incurred to date
1,400
2,900
Estimated costs to completion
5,600
5,200
Value of work certified to date
2,800
3,000
Progress billings
2,600
3,400
An old mineshaft has been discovered under the site for the Rottenrow Centre and the costs of dealing with this have been taken into account in the calculation of estimated costs to completion. C Co's lawyers are reasonably confident that the customer will have to bear the additional costs which will be incurred in stabilising the land. If negotiations are successful then the contract price will increase to $10m.
C Co recognises revenues and profits on construction contracts on the basis of work certified to date.
Required
(a) Calculate the figures which would appear in C Co's financial statements in respect of these two projects.
(b) It has been suggested that profit on construction contracts should not be recognised until the contract is completed. Briefly explain whether you believe that this suggestion would improve the quality of financial reporting for long-term contracts.
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