Question

Mega Construction Pvt. Ltd. obtains a $75 million contract to construct a building. It estimates that it will take 4 years to complete the project. The estimated cost of the project is $60 million. Mega Construction incurs costs amounting to $20 million in Year 1, $15 million in Year 2, $13 million in Year 3, and $12 million in Year 4. Assuming that the outcome of the project can be estimated reliably and that Mega follows IFRS, the profit that the company should recognize in Year 1 is closest to:

Answer 1

The profit to be recognized by Mega Construction Pvt. Ltd. under IFRS in Year 1, using the percentage-of-completion method, is $5 million, which is one-third of the total expected profit, aligned with the proportion of costs incurred in that year.

Step-by-step explanation:

Under International Financial Reporting Standards (IFRS), when an outcome of a project can be estimated reliably, the percentage-of-completion method is used to recognize revenue and profits each year based on the progress of the project. The profit is recognized based on the proportion of project completion.

The total estimated costs of the project are $60 million, and the total contract value is $75 million, giving us an overall expected profit of $15 million upon completion. In Year 1, costs incurred are $20 million, which is one-third (20/60) of the total estimated costs. With a third of the work completed, we would recognize a third of the total estimated profit.

Therefore, the profit to be recognized in Year 1 is one-third of $15 million, which is $5 million.

Answer 2

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Step-by-step explanation:

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