Question

Problem 1: Long-Term Contract

At the beginning of 2018, the Harding Construction Company received a contract to build an office for $5 million.

Harding will construct the building according to the specifications provided by the buyer, and the project is estimated to take three years to complete.

According to the contract, Harding will be the buyer in installments over the construction period according to a prearranged schedule.

Information related to the contract is as follows:

2018                    2019                2020

Construction costs incurred during the year            $1,500,000        $1,000,000       $1,600,000

Construction cost incurred in prior years                               -0-            1,500,000          2,500,000

                                                                                            --------------         -------------           -------------

Cumulative actual construction costs                            1,500,000         2,500,000         4,100,000

Estimated costs to complete at end of year                  2,250,000         1,500,000                  -   0 -

                                                                                               --------------         --------------        -------------

Total estimated and actual construction costs             3,750,000           4,000,000         4,100,000

Billing made during the year                                              1,200,000          2,000,000        1,800,000

Cash collections during the year                                       1,000,000           1,400,000       2,600,000

            Task:

                        (ii) Determine the revenue amount under the percentage of completion method.

Answer 1

• All working forms part of the answer
• The question asks about only REVENUES for each year to be recognised:

Working		2018	2019	2020
A	Contract Price	$       5,000,000.00	$       5,000,000.00	$          5,000,000.00
B	Cost Incurred to Date	$       1,500,000.00	$       2,500,000.00	$          4,100,000.00
C	Estimated cost yet to be incurred to complete the contract	$       2,250,000.00	$       1,500,000.00	$                                -
D = B+C	Total Cost	$       3,750,000.00	$       4,000,000.00	$          4,100,000.00
E = (B/D) x 100	% of Completion	40.00%	62.50%	100.00%
F = A x E	Revenue to date	$       2,000,000.00	$       3,125,000.00	$          5,000,000.00
G	Revenue of Previous year	$                            -	$       2,000,000.00	$          3,125,000.00
H = F - G	Net Revenue this year	$       2,000,000.00	$       1,125,000.00	$          1,875,000.00

• Answer: Revenue to be recognised:

	2018	2019	2020
Net Revenue this year	$       2,000,000.00	$       1,125,000.00	$          1,875,000.00