Question

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $410 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

2018  

Costs incurred during the year $ 50

Estimated costs to complete as of December 31 $200

2019  Costs incurred during the year $ 150

Estimated costs to complete as of December 31 $50

2020 Costs incurred during the year $ 45

Estimated costs to complete  —

Required:

1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 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 2018, 2019, and 2020 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 2019 are $200 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. (Enter your answers in millions. Loss amounts should be indicated with a minus sign. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

Percentages of completion Choose numerator ÷ Choose denominator = % complete to date Actual costs to date Estimated costs to complete 2018 ÷ = 0 2019 ÷ = 0 2020 100.00% 2018 To date Recognized in prior years Recognized in 2018 Construction revenue $0 Construction expense $0 Gross profit (loss) $0 2019 To date Recognized in prior years Recognized in 2019 Construction revenue $0 Construction expense $0 Gross profit (loss) $0 2020 To date Recognized in prior years Recognized in 2020 Construction revenue $0 Construction expense $0 Gross profit (loss) $0

Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time. (Enter your answers in millions. Loss amounts should be indicated with a minus sign.)

	Year Revenue recognized Gross Profit (Loss) recognized 2018 million million 2019 million million 2020 million million

Suppose the estimated costs to complete at the end of 2019 are $200 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.  (Enter your answers in millions. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

	Percentages of completion Choose numerator ÷ Choose denominator = % complete to date 2019 ÷ = 0 2019 To date Recognized in prior Years Recognized in 2019 Construction revenue $0 Construction expense $0 Gross profit (loss) $

Answer 1

Answer to 1st Question :

1. Computation of revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion :

Percentages of completion
	Choose numerator	÷	Choose denominator	=	% complete to date
	Actual costs to date		Estimated costs to complete
2018	50	÷	250	=	20.00%
2019	200	÷	250	=	80.00%
2020					100.00%
2018
	To date	Recognized in prior years		Recognized in 2018
Construction revenue	$82+/-1	+/-1		$82+/-1
Construction expense	$(50)+/-1	+/-1		$(50)+/-1
Gross profit (loss)	$32+/-1	+/-1		$32+/-1
2019
	To date	Recognized in prior years		Recognized in 2019
Construction revenue	$410+/-1	$82+/-1		$328+/-1
Construction expense	$(200)+/-1	$(50)+/-1		$(150)+/-1
Gross profit (loss)	$210+/-1	$32+/-1		$178+/-1
2020
	To date	Recognized in prior years		Recognized in 2020
Construction revenue	$0	$410+/-1		$410+/-1
Construction expense	(245)+/-1	(200)+/-1		$(445)+/-1
Gross profit (loss)	(245)+/-1	$210+/-1		$(35)+/-1

2. Computation the amount of revenue and gross profit or loss to be recognized in 2018, 2019, and 2020 using the completed contract method.

Year	Revenue recognized		Gross Profit (Loss) recognized
2018	0	million	0	million
2019	0	million	0	million
2020	410	million	165	million

3. estimated costs to complete at the end of 2019 are $200 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

2019

Estimated total gross profit (Loss)

Percentages of completion
	Choose numerator	÷	Choose denominator	=	% complete to date
2019	$ 200	÷	$ 320	=	62.50%
2019
	To date	Recognized in prior Years		Recognized in 2019
Construction revenue	$256.00	$165.00		$91.00
Construction expense	$(200.00)	$(50.00)		$(150.00)
Gross profit (loss)	$56.00	$115.00		$59.00

Explanation :

($ in millions)	2018			2019			2020
Contract price	$	410		$	410		$	410
Actual costs to date		50			200			245
Estimated costs to complete		200			50			- 0 -
Total estimated costs		250			250			245
Estimated gross profit (loss) (actual in 2018)	$	160		$	160		$	165

Particulars 2018 2019 2020

Estimated total Gross Profit(Loss) $160 $160 $0

Actual Gross Profit (Loss) $0 $0 $165

Gross profit (loss) recognition:

2018 : $50/$250*$160 = $32.00

2019: $200/$250*$165 = $132.00

2020 :$410-$245 =$165-$(32+132) = $165-$164 = $1.00

Revenue Recognition :

2018 : $50/$250*$410 = $82.00

2019 : $200/$250*$410 = $328.00

2020 : $410 - ($328+$82) = $410-$410 = $0

3.

Revenue Recognition for 2019 :

$200/$320*$410 = $256 -$165 =$91

Gross profit for 2019 :

$200/$320*$10 = $6-32 =$(26) Loss