Question

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $260 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2018			2019			2020
Costs incurred during the year	$	60		$	80		$	65
Estimated costs to complete as of December 31		140			60			—

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 $110 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Required 1

Required 2

Required 3

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. (Enter your answers in millions. Loss amounts should be indicated with a minus sign. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

Percentages of completion Choose numerator ÷ Choose denominator = % complete to date 2018 ÷ = 2019 ÷ = 2020 100.00% 2018 To date Recognized in prior years Recognized in 2018 Construction revenue $55 Construction expense $(40) Gross profit (loss) $15 2019 To date Recognized in prior years Recognized in 2019 Construction revenue $92 Construction expense $(80) Gross profit (loss) $12 2020 To date Recognized in prior years Recognized in 2020 Construction revenue $73 Construction expense $(50) Gross profit (loss)

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. (Enter your answers in millions. Loss amounts should be indicated with a minus sign.)

	Year Revenue recognized Gross Profit (Loss) recognized 2018 million million 2019 million million 2020 million million

3.

Suppose the estimated costs to complete at the end of 2019 are $110 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method. (Enter your answers in millions. Use percentages as calculated and rounded in the table below to arrive at your final answer.)

	Percentages of completion Choose numerator ÷ Choose denominator = % complete to date 2019 ÷ = 2019 To date Recognized in prior Years Recognized in 2019 Construction revenue Construction expense Gross profit (loss)

Answer 1

Answer 1

($ in millions)	2018	2019	2020
Contract price	$260	$260	$260
Actual costs to date	60	140	205
Estimated costs to complete	140	60	0
Total estimated costs	200	200	205
Estimated gross profit (actual in 2020)	$60	$60	$55

Revenue recogition
2018	60/200=30%*$260=$78
2019	140/200=(70%*$260)-$78=$104
2020	$260-($78+$104)=$78

Gross profit(loss) recognition
2018	$78-60=$18
2019	$104-80=$24
2020	$78-65=$13

Note: We also can calculate gross profit directly using the percentage of completion:
2018	$60/200=30%*$60=$18
2019	$140/200=70%*$60=$42-18=$24
2020	$260-205=$55-(18+24)=$13

Answer 2

Year	Revenue recognized	Gross profit(loss) recognized
2018	0	0
2019	0	0
2020	$260	$55

Answer 3

2019 Revenue recognition
$140/$250=(56%*260)-$78=$67.6 2019 Gross profit(loss) recognition $67.6-60=$7.6 Note: Also can calculate gross profit directly using the percentage of completion: $140/$250=56%*$10=$5.6-18=$(12.4)loss