Question

On June 15, 2021, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2021			2022			2023
Costs incurred during the year	$	40		$	80		$	50
Estimated costs to complete as of December 31		120			60			—

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2021, 2022, and 2023 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit will Sanderson report in its 2021, 2022, and 2023 income statements related to this contract assuming this project does not qualify for revenue recognition over time.
3. Suppose the estimated costs to complete at the end of 2022 are $80 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2022 assuming Sanderson recognizes revenue over time according to percentage of completion.

Answer 1

Percentage of completion is accounting method to calculate revenues and expenses for various years of long term contracts based on the completion of contracts. This method requires to report revenues and expenses on period by period basis on the basis of percentage of contract that has been fulfilled.

1. Percentage of completion

2021

2022

2023

2).

3).