Contracts X and Y
1. The details of two illustrative contracts for which Toshiba used the percentage of completion method are provided below. Although the amounts and financial details of these contracts are hypothetical, contracts X and Y are similar to several projects described in the investigation report.
Contract X was accepted by Toshiba at the beginning of fiscal 2012 for JPY 6,408.17 million, when the original estimate of the total contract costs was JPY 4,806.13 million. Although the costs and cost estimates changed as the contract progressed (see table below), for reasons similar to those described in the case, Toshiba did not change the original cost estimates.
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2012
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2013
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2014
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Cost incurred to Date
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2,210.82
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4,449.27
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7,309.52
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Estimated additional costs to complete
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3,316.23
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1,906.83
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0.00
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Contract Y bears many similarities with Project I. Assume that it was accepted by Toshiba at the beginning of fiscal 2012 for JPY 1,336.13 million, although the cost estimate at that time was JPY 1,402.94 million and the contract was expected to incur a loss, Toshiba accepted it for competitive reasons but did not record a provision for loss at the inception of the contract. As Contract Y progressed, the costs and cost estimates changed (see table below), and the eventual total costs (JPY 1,510.81 million) exceeded the original cost estimate, but Toshiba did not change the original cost estimates. Instead, it recorded a loss on the contract of JPY 174.68 million in the year in which the contract was completed.
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2012
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2013
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2014
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Cost incurred to Date
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575.21
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1,031.78
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1,510.81
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Estimated additional costs to complete
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862.81
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442.19
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0.00
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2. For the illustrative Contract X described in the case, compute construction revenues, expenses, and gross profit (or loss) for each year, and balances in the construction in progress, and provision for loss on contract accounts in the balance sheet at the end of each year( using percentage of completion method ). You should present the numbers according to Toshiba's accounting, and the numbers according to U.S. GAAP in separate columns in Table 1 (Panel A), and support them with the appropriate journal entries for each year. All the amounts should be in millions of JPY.
3. Repeat requirement 1 above for Contract Y described in the case Table 1 below (Panel B). Journal entries are not necessary, however.
Table 1 (Panel A)
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2012
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2013
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2014
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Particulars
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Construction revenues for the year
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Construction expenses for the year
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Gross profit (loss) for the year
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Additional loss, if any, for the year
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Construction in progress, year-end
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Provision for loss on contacts, year-end
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Table 1 (Panel B)
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Particulars
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Amounts per
Toshiba's
books
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Correct (U.S.
GAAP)
Amounts
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Construction revenues for the year
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Construction expenses for the year
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Gross profit (loss) for the year
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Additional loss, if any, for the year
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Construction in progress, year-end
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Provision for loss on contacts, year-end
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