Reference no: EM132322219
Question
Cassowary PTY is a mid-sized Australian-based firm that builds causeways and bridges. The nature of the building sites often involves a lot of heavy preparation (e.g. digging and clearing of mud and loose stones to expose solid rock) and the building of casements and/or seawalls.
As a result, its jobs often take well over three years to complete. Also, given the relatively small size of the firm, it can only take on one or two large jobs ($50-600 million) at any given time.
Currently, Cassowary PTY is starting a new job where the project payment of $570 million USD is shared equally, jointly and severally guaranteed by the Indian and the Sri Lankan governments.
The project is to build a causeway and bridge to link Rameshwaram (Tamil Nadu, India) with Mannar Island (Mannar District, Sri Lanka). The job, which will mostly use local labour and materials, it is expected to take three years to complete. Payment is to be in three equal progress payments starting 01 December, 2015.
Table 4-1: Rebuilding of Rama's Setubandhanam Project (amounts in $ ,000 USD)
Item/Description 31Dec/15 31 Dec/16 31 Dec/17
Contract Price $570,000 $570,000 $570,000
Progress Payment $190,000 $190,000 $190,000
% of Total Payment Complete 33.33% 66.67% 100.0%
Less: Estimated Costs to date $60,000 $350,000 $456,000
Estimated Costs to Complete 396,000 166,000 0
Estimated Total Costs $456,000 $456,000 $456,000
Estimated Total Gross Profit/(loss) $114,000 $114,000 $114,000
% of Project Costs Complete 13.16 % 76.75% 100.00%
Required:
a) The President and owner wants to recognize the revenue evenly over the three years - is his approach true and fair? (Explain and if needed give an alternative approach).
b) Using the information in Table 4-1 (above) please make the appropriate journal entries for the Rebuilding of Rama's Setubandhanam Project for 31 December, 2016.