Question

In 2021, the Westgate Construction Company entered into a contract to construct a bridge for $12,000,000.

The bridge was completed in 2023. Information related to the contract is as follows:

2021 2022 2023
Cost incurred during the year    $1,840,000 $3,760,000 $4,500,000
Estimated costs to complete as of year-end $6,160,000 $5,600,000 $0
Billings during the year $3,000,000 $4,000,000 $5,000,000
Cash collections during thee year    $2,600,000 $3,900,000    $5,100,000

a. Westgate recognizes revenue over time according to percentage of completion. What gross profit (loss) will Westgate record on the contract for 2022?

b. Westgate recognizes revenue using the completed contract method. What amount will Westgate show on the balance sheet at December 31, 2022?

Answer 1

Answer to Question a):

Gross Profit/(Losses) Westgate will record on the Contract for 2022 = Revenue for year 2 - Actual Cost incurred during year 2

= $37,11,795 - $37,60,000

=($48,205)

We will match the percentage of completion with the amount of revenue recognized.

[Cost Incurred /(Cost Incurred + Estimated Cost yet to be incurred)]*100

Year 1:

18,40,000 / (18,40,000+ 61,60,000) = 23%

Earned revenue : 120,00,000 x 23% = 27,60,000

Then, year 2:

37,60,000 / (37,60,000 + 56,00,000) = 40%

Earned revenue ($120,00,000-$27,60,000) x 40% = 37,11,795

Finally year 3 we recognize the entire revenue missing

$120,00,000 - $27,60,000 - $37,11,795 = $55,28,205

.........................................................................................................................................

Answer to Question b):

When Westgate recognizes revenue using the completed contract method. it will recognise profit in the year of 100% Completion of Contract.  Westgate will recognise $64,00,000 in Profit and Loss Account and and Recognise total Revenue of $120,00,000 in Profit and loss so Debtors of $120,00,000 may be recognised in Balance Sheet

Year	Actual Cost Incurred(A)	Total Cost incurred till date (B)	Total Estimated Cost [C]	% of Completion (D)(B/C)	Contract Price(E)	Total Revenue to be recognised(F)(E*D)	Gross Profit(H) (G-A)
2021	1,840,000	1,840,000	6,160,000	0	12,000,000	-	-
2022	3,760,000	5,600,000	5,600,000	100%	12,000,000	12,000,000	6,400,000
2023	4,500,000	10,100,000	-	-	12,000,000	-	-