QUESTION 3 The initial price of a construction contract is $ 900,000. The Contract is subject to material cost escalation. For this purpose, a material price index is applied, which was at 1,200 at the inception of the contract. It is estimated that the material component would be 50% of the contract price. It has been further estimated that material consumption would 40% during the Year 1, 40% during Year 2 and 20% during Year 3. Estimated contract completion time is 3 years. The contractor has incurred contract costs of $ 3,00,000 at the end of Year 1 of which material cost was $ 190,000. It has estimated that other costs to complete the contract (costs other than material costs) will be $ 200,000. At the end of Year 1, the contractor company was confused, as there was a substantial change in design for which it has worked out a variation charge of $ 100,000 mainly for labour costs. However, the negotiation was in progress. Moreover, it had claimed $ 50,000 for delay in work caused by the customer. It was not sure whether this claim would be accepted. So, if the contractor was not sure about further continuation of work as well. The customer has paid 10% of the initial contract price as signing price. It is highly probable that it will pay another instalment of 15% at the Year End inclusive of cost escalation. Material price Index at the Year End was 1,300. How should the contractor recognize contract revenue and costs?