Consultant Inc. is a firm of consulting engineers, newly established to advise on a large project taking three years to complete. Their fee for this work is a percentage of the total project costs, payable on completion of the project. In the interim, advances on the final fee are made at six-monthly intervals.
The following advances were received by Consultant Inc. during the three-year period:
Year ended 31 December 2020 K25,000
Year ended 31 December 2021 K30,000
Year ended 31 December 2022 K30,000
When the total costs were computed during the year ended 31 December 2020, it was found that a further sum of K50,000 was due to Consultant Inc, REQUIRED:
(a) Explain how Consultant Inc. would show the payments made during the periods covered by the project. Justify your explanation in terms of the concepts of accounting which you consider apply to this situation.
(b) Would you change your reasoning at all in the light of the following information?
(i) The advance payments are not contractual but discretionary on the part of the paying company:
(ii) A clause in the consulting agreement requires Consultant Inc. to undertake – free of charge extra work to remedy defects appearing within three years of the completion project.
