Question

Question#1

On December 31, 2014, State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State Construction anticipates the construction will take three years. The company’s accountants provide the following contact details relating to the project:

Contract price	$520 million
Estimated construction costs	$400 million
Estimated total profit	$120 million

During the three-year construction period, State Construction incurred costs as follows:

2015	$ 40 million
2016	$240 million
2017	$120 million

Required:

Compute the following items for each year using the cost-to-cost method:

1. revenue recognized
2. construction costs expensed
3. gross profit earned

Answer 1

Contract price	$520 million
Estimated construction costs	$400 million
Estimated total profit	$120 million

cost incurred for 3 years,

2015	$ 40 million
2016	$240 million
2017	$120 million

As per Cost -to- cost method,

propotion of expenses incurred in each year equals,

in 2015

(40/total cost)*100

=40/400

=10%

in 2016

(240/400)*100=60%

in 2017,

(120/400)*100=30%

So Revenue recognised in each year is as follows,

Total Revenue*Percentage of completion in each year

In 2015,

520million *10%=$52million

In 2016,

520million *60%=$312million

In 2017,

520million *30%=$156million

Construction cost expensed in each year

2015 $40 million

2016 $240 million

2017 $120 million

Gross profit earned in each year is as follows,

Revenue recognised in each year - cost expensed in each year

2015

52 million - 40 million =$12 million

2016

312 million - 240 million =$72 million

2017

156 million - 120 million =$36 million