Question

On June 15, 2021, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $340 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2021 2022 2023 Costs incurred during the year $ 40 $ 120 $ 50 Estimated costs to complete as of December 31 160 90 — 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 $160 million instead of $90 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

1. The percentage of completion method is used for longer-term projects and recognizes revenue and expenses as a percentage of the project’s completion during the period. Computation of revenue and gross profit recognized in different years will be as follows:

2. When the long term contract does not recognize over time then it should be accounted for completed contract method. The completed contract method is an method that postpones the reporting of income and expenses, till a contract is completed. Hence, all the profit of the contract will be recognized in the year in which it is completed.

Hence there will be no revenue and profit that will be recognized during 2021 & 2022.

All the revenue and profit will be recognized in the last year i.e. 2023.

Total revenue to be recognized in the year 2023 = $340 Million

Total Gross profit to be recognized in the Year 2023 = Total Revenue - Total Expenses

Therefore, Total Gross profit to be recognized in the Year 2023 = $340 million - ($40+120+50)million = $130 million

3. Computation of the amount of revenue and gross profit or loss to be recognized in 2022 when the estimated costs to complete at the end of 2022 are $160 million instead of $90 million:

Hence, the total revenue and loss that will be recognized in year 2022 will be $120 million and $18 million respectively.