Question

(Analysis of Percentage-of-Completion Financial Statements) In 2020, Steinrotter Construction Corp. began construction work under a 3-year contract. The contract price was $1,000,000. Steinrotter uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of cost incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2020, are shown below. Balance Sheet Accounts receivable $18,000 Construction in process $65,000 Less: Billings 61,500 Costs and recognized profit in excess of billings 3,500 Income Statement Income (before tax) on the contract recognized in 2020 $19,500 Instructions

a.   How much cash was collected in 2020 on this contract?

b.   What was the initial estimated total income before tax on this contract?

Answer 1

a)

construction contract billings in year 2020	61500
less"'Accounts receivable as on 31/12/2020	(18000)
Cash collected in 2020	43500

b)

Percentage of gross profit recognized in 2020 as a % of revenue = Gross profit /Revenue recognized

                                              = 19500/65000

                                                = .30 or 30%

the initial estimated total income before tax on this contract =Contract price *% of gross profit

                                         = 1,000,000 * 30%

                                         = $ 300,000