Question

1.2 Dundee limited undertook a contract for N$500 000 on 1st January 2018. On 31 December 2018 when the accounts were closed, the following details about the contract were gathered Particulars Materials purchased Wages paid General expenses Plant Purchased Materials on hand 31-12-2018 Wages accrued 31-12-2018 Work certified Cash received De Work uncertified 100,000 45,000 10,000 50,000 25,000 5,000 200,000 50,000 5,000 15,000 ation of Plant The above contract contained an escalator clauses which read as follows: In the event of prices of materials and rates of wages increase by more than 5% the contract price would be increased accordingly by 25% of the rise in the cost of materials and wages beyond 5% in each case". It was found that since the date of signing the agreement the prices of materials and wage rates increased by 25% the value of the work certify does not take into account the effect of the above clause REQUIRED: MARKS 1.2 Prepare the contract account. Working should form part of the answers

Answer 1

Contract A/c
	To Material Purchased		100000	by Work in Progress
	"     Wages paid	45000		"    Work Certified	200000
	Add: Outstanding	5000	50000	"    Work Uncertified	15000	215000
	"     General Expenses		10000	"    Material at site		25000
	"     Plant issued		50000	"    Plant at site	50000
				"    Less: Depreciation	5000	45000
	"     Motional Profit c/d		75000
			285000			285000
	"     P & L      a/c		18750	By    Notional profit b/d		75000
	"    WIP- Reserve A/c		56250
			75000			75000

Working Note

Increase in the price of material and wages

25% of the value of work certified

= 200000*25/100 = 50000

Percentage of increase of material on contract price

(50000/500000)*100    = 10%

* It is more than 5%of the contract price. There fore

Contract price = 500000+50000    = 550000

Percentage of work completed =

work certified / Contract Price

((200000 / 550000)*100)    = 36%

Amt to be transferred to P&L A/c

In the given problem work certified is more than 1/4 th

of the contract price and less than 1/2 of the same. Therefore

amount to be transferred to P&L A/c =

Notional profi*1/3*(cash received / work certified

75000*1/3*(150000/200000)              = 18750