Question

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2018			2019			2020
Costs incurred during the year	$	70		$	60		$	30
Estimated costs to complete as of December 31		130			30			—

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 $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Answer 1

1.

Revenue recognition:

2018- Estimated cost to complete= $130

Contract price= $310

Profit = 310-130= $180

For 2018;

Cost incurred during the year= $70

Percentage completed= 70/130*100= 53.85%

Revenue to be recognised= $180*53.85%= $97.

2019-

Estimated cost= 130+30= 160

Percentage completed= 60/160*100=37.5%

New revenue= 310-160= $150

REvenue to be recognised= 150*37.5%= $56.25

2020:

Percentage completed= 30/160*100=18.75%

Revenue to be recognised= 150*18.75%= $28.13

2.

Whole revenue of $180 shall be recorded in 2018 if it doesnot qualify for recognition over time.

And in expense of $30 shall be recognised.

3.

2018- Estimated cost to complete= $130

Contract price= $310

Profit = 310-130= $180

For 2018;

Cost incurred during the year= $70

Percentage completed= 70/130*100= 53.85%

Revenue to be recognised= $180*53.85%= $97.

2019-

Estimated cost= 130+120= 250

Revenue=

Percentage completed= 60/250*100=24%

New revenue= 310-250=$60

REvenue to be recognised= 60*24= $14.4

2020:

Percentage completed= 30/250*100=12%

Revenue to be recognised= 60*12%= $7.2