Question

Trillium Construction Company is a publicly traded company that began a long-term government contract on July 1, 2019 to build a housing complex for the price of $8,000,000. The construction was expected to take 24 months to complete.

a.       For the year ended December 31, 2019, Trillium incurred construction costs of $1,300,000 and it was estimated that an additional $3,900,000 in costs would needed to complete the contract. Trillium billed the government $2,000,000 during the first year and collected $1,000,000 by December 31, 2019. Trillium uses the percentage-of-completion method of revenue recognition. Calculate the gross profit to be recognized for the year ended December 31, 2019.

b.       Then, for the year ended December 31, 2020, Trillium incurred construction costs of $3,180,000 and at that point, it was estimated that an additional $1,120,000 in costs would be needed to complete the contract. Trillium billed the government $4,000,000 during the second year and collected $4,500,000 by December 31, 2020. Continuing to use the percentage-of-completion method of revenue recognition, calculate the revenue recognized for the year ended December 31, 2020.

c.       The CEO of Trillium has heard that the completed-contract method is easier to use than the percentage-of-completed method.   Briefly explain to the CEO (approximately 1 or 2 sentences) why Trillium should or should not adopt the completed contract method.

Answer 1

(a)CALCULATION OF GROSS PROFIT TO BE RECOGNIZED FOR YEAR ENDED 31 DECEMBER 2019

Degree of Completion = Cost incurred till date/Total Cost to be Incurred*100

Cost incurred till 31st Dec 2019 = $1300000

Cost to be Incurred = $1300000+$3900000

=$5200000

Degree of Completion = $1300000/$5200000*100

=25%

Total Revenue/Price for whole construction service = $8000000

Revenue To be Recorded = Price for whole Construction Activity*Degree of Completion

Revenue to be Recorded = $8000000*25%

=$2000000

Gross Profit of Company = $2000000-$1300000=$700000

So, although $1000000 has been received but revenue will be recorded for 31st December 2019 $2000000

However, $2000000-$1000000=$1000000 will be recorded as debtors in their balance sheet.

(b)CALCULATION OF GROSS PROFIT TO BE RECOGNIZED FOR YEAR ENDED 31 DECEMBER 2020

Degree of Completion = Cost incurred till date/Total Cost to be Incurred*100

Cost incurred till 31st Dec 2020 = $1300000+$3180000=$4480000

Cost to be Incurred = $4480000+$1120000

=$5600000

Degree of Completion = $4480000/$5600000*100

=80%

Total Revenue/Price for whole construction service = $8000000

Revenue To be Recorded = Price for whole Construction Activity*Degree of Completion

Cumulative Revenue to be Recorded = $8000000*80%

=$6400000

Revenue Already Recorded in 2019= $2000000

Revenue to be Recorded in 31st December, 2020= $6400000-$2000000 = $4400000

So, revenue will be recorded for 31st December 2019 $4400000

Gross Profit of the Company = $4400000-$3180000=$1220000

Debtors in the books of company will be :-$1000000+$4400000-$4500000= Nil

(c) Disadvantages of Completed Contract Method/Percentage Completion Method Over Completed Contract Method:-

Under Completed Contract Method, income from multiple projects and years is recorded in the same year when contract is compketed, no matter when the revenue was earned. In such case, no losses on any of the contracts cannot be deducted until the contracts are completed