Tax Accounting

Lecture 08
Commercial and industrial
activities profits
Profits of long term contract:
The taxable net profit for long-term contracts is calculated as follows:
1- Determine percentage of contract completion
= Actual Cost
Total estimated cost X 100
2- Determine estimated profit contract =
Total revenue of contract – estimated contract cost
3- Profit or loss estimated for each period of contract
Estimated profit of contract each period =
Total estimated profit X Percentage of completion
Example:

A long term contract of a value L.E. 25 million is to be finished within 24

months.
The cost of the contract was L.E. 20 million.
In the first year, the actual cost amounted to L.E.12 million.

Calculate:
The taxable net profit for the first year
Solution:
1- Percentage of completion in first year
= 12,000,000
20,000,000 X 100 = 60%
2- Total estimated profit =
25,000,000 – 20,000,000
= L.E. 5,000,000
3- Estimated profit for 1st year
= 5,000,000 X 60/100
= L.E. 3,000,000
Suppose that the actual cost in the second year was L.E.9,000,000
Calculate: The taxable profit in second year
Solution:
1- Actual cost for 1st and 2nd year
= 12,000,000 + 9,000,000 = L.E. 21,000,000
2- Net Profit = 25,000,000 – 21,000,000
= L.E.4,000,000
3- Profit for year 2 = 4,000,000 – 3,000,000
= L.E.1,000,000
 Example:
ABC firm – sole proprietorship – started implementation on of its long term
contracts during 2016 . The contract value amounted to L.E. 300,000 the firm
estimated its cost at L.E. 250,000.
The following are other data of the contract during the duration of its
implementation (amounts in L.E.):
Particulars 2016 2017 2018
A. Actual costs in previous years --- 45,000 167,400
45,000 122,400 92,600
B. Actual costs during the year
----
C. Estimated cost of the contract completion
205,000 102,600
 Required:
Determine the taxable net profit during the periods of the contract completion:
Solution:
1- Determination of percentage of completion:
Particular 2016 2017 2018
• actual costs in previous years --- 45,000 167,400

•Actual costs during the year 45,000 122,400 92,600

Actual costs till 31/12 (1) 45,000 167,400 260,000

• estimation cost of contract completion 205,000 102,600 ------

Total estimated costs (2) 250,000 270,000 260,000

Percentage of completion (1÷2) 18% 62% 100%
2- Determination of the estimated profit from contract :

Particular 2016 2017 2018

Total revenue ( contract value) 300,000 300,000 300,000
(-) total estimated costs of the contract (250,000) (270,000) (260,000)

Estimated gross profit ( or loss) for the contract 50,000 30,000 40,000
 3- Profit or loss estimated for the contract during each tax period
particular 2016 2017 2018
Estimated gross profit (1) 50,000 30,000 40,000
X X X X
Percentage of completion (2) 18% 62% 100%

Estimated profit for the contract till 31/12 (1 × 2 ) 9,000 18,600 40,000

Less : the profit occurred during the previous year (-------) (9,000) (18,600)

Estimated profit for the period 9,000 9,600 21,400

The amount of revenues , cost, and profit ( or loss) which are entered to
income statement during the taxable period of the contract , shall be as
follows:
Particular 31/12 Recognized in Recognized in
previous year current year
Year 2016:
Revenue (300,000×18%) 54,000 --------- 54,000
Less: costs (250,000×18%) 45,000 --------- 45,000
Profit 9,000 --------- 9,000
Year 2017:
Revenue (300,000×62%)
Less: costs(270,000×62%) 186,000 54,000 132,000
Profit 167,400 45,000 122,400
Year 2018: 18,600 9,000 9,600
Revenue (300,000×100%)
Less: costs (260,000×100%) 300,000 186,000 114,000
260,000 167,000 92,600
Profits
40,000 18,600 21,400