Question

the construction activity for the year-end 31 December 2020, are as follows:

project	contract price	costs incurred to 31/12/2020	estimated costs to complete	billing to 31/12/2020	cash collections to 31/12/2020
AA	$1,500,000	$400,000	$1,200,000	$300,000	$280,000

Required:

1) Prepare a schedule by project, showing clearly the amount of gross profit (loss) of the project before deducting selling, general, and administrative expenses for the year ended 31 December 2020 using the percentage-of-completion method.(based on estimated costs.)

2)Based on the schedule, show the amount of gross profit ( or loss) before selling, general,and administrative expenses for the year ended 31 December 2020, which would be reported if the following method are used:

(I) the cost-recovery method.

(II) The percentage-of-completion method ( based on estimated costs)

3) Determine the construction in process balance that would appear in the statement of financial position of the company as at 31/12/2020 for the project AA, assuming that the precentage-of-completion method is used. show all the working.

Answer 1

1) Preparation of schedule for the year ended 31st December 2020 :

Contract	Contract Price	Estimated costs	Estimated gross profit/(loss)	Revenue earned	Cost of revenue	Gross Profit	Estimated cost to complete	Billed to date	under billed
AA	$1500000	$1600000	($100000)	$375000	$400000	($25000)	$1200000	$300000	$75000

Percent Complete = Cost of IncurredTo Date / Total Estimated Contract Cost

= $400000/ $1600000 = 25%

Contract Amount X Percent Complete = Total Earned Revenues = %1500000 * 25% = $375000

Total Earned Revenues - Total Cost of Revenues = Gross Profit = $375000 - $400000 = ($25000)

2) Computation of gross profit under the following methods :

I) Cost recovery method

The cost recovery method of revenue recognition refers to a method in which a business does not recognize income related to a sale until the cash collected exceeds the cost of the goods or services sold. In other words, using this method, revenue is only recognized when cash payments have recovered the seller’s cost.

Here in this senario since the amount of cash collected $280000 does not recover the costs incurred till date by the seller $400000, the profit would not be recognized or reported in the current year. The revenue would be recognized during the period in which the cash collected exceeds the cost incurred till date.

II) Percentage of completion method :

The percentage of completion indicates that revenue from performance obligations recognized over a period of time should be based on the percentage of completion. The method recognizes revenues and expenses in proportion to the completeness of the contracted project. It is commonly measured through the cost-to-cost method.

Therefore as per this method , a loss of $25000 shall be reported in the current year financial statements.

3) Construction in process balance which would appear in the statement of financial position of the company as at 31/12/2020 is as follows :

Project AA	31/12/2020
Beginning balance	nil
Cost accumulated during the period	$1,600,000
Total Non transferred costs	$1,600,000
Costs Transferred to P & L	($400,000)
Ending balance in Project AA's CIP	$12,00,000