Question

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,730,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:

	2020			2021
Costs incurred during the year	$	476,000		$	1,030,000
Estimated costs to complete		884,000			0
Billings during the year		470,000			1,260,000
Cash collections during the year		370,000			1,360,000

Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.

Required:
Compute the amount of gross profit recognized during 2020 and 2021.

Beavis Construction Company was the low bidder on a construction project to build an earthen dam for $1,730,000. The project was begun in 2020 and completed in 2021. Cost and other data are presented below:

	2020			2021
Costs incurred during the year	$	476,000		$	1,030,000
Estimated costs to complete		884,000			0
Billings during the year		470,000			1,260,000
Cash collections during the year		370,000			1,360,000

Assume that Beavis recognizes revenue on this contract over time according to percentage of completion.

Required:
Compute the amount of gross profit recognized during 2020 and 2021.

Answer 1

	2020	2021	Total
Cost incurred during the year	$476,000	$1,030,000	$1,506,000
Costs incurred till date	$476,000	$1,506,000
Estimated costs to complete	$884,000	$1,506,000
Billings during the year	$470,000	$1,260,000
Cash collections during the year	$370,000	$1,360,000
Percentage complete	54%	100%
Revenue during the year based on % of completion	$931,538	$798,462
Expenses incurred	$476,000	$1,030,000
Gross profit recognized	$455,538	-$231,538	$224,000

From the case in question, the total revenue on the project is $1,730,000

From the table above we see costs $476,000 and $1,030,000 incurred during 2020 and 2021 respectively, so total cost of project = $476,000+$1,030,000 = $1,506,000.

Costs incurred till date tells us total project cost till date,so for 2021, it is cumulative of cost incurred in 2020 and 2021. This is required to calculate % of project completed.

Estimated total costs to complete the project are given as $884,000 in 2020, however, costs overran in 2021 to total cost of $1,506,000 for the project.

Billings during the year and cash collections are bills generated and cash collected out of total project price.

No, percentage of project complete = Cost incurred till date/Estimated costs to complete

So, for 2020, % complete = $476,000/$884,000 = 54%

However, in 2021,costs incurred till date became $1,506,000 and since it was project completion year, so estimated total costs to complete also changes to $1,506,000

% of project complete = $1,506,000 / %1,506,000 = 100%

Revenue recognized for 2020 = % of project complete*Total project price

=54%*$1,730,000 = $931,538

Further, expenses incurred in 2020 = $476,000

So, gross profit recognized in 2020 = $931,538 - $476,000 = $455,538

Revenue recognition for 2021 = (%of project complete*Total Project Price) – Revenue previously recognized

So, revenue for 2021 = $1,730,000*54% - $931,538

=$798,462

Expenses incurred in 2021 = $1,030,000

So, loss recognized during 2021 = $798,462 - $1,030,000 = $231,538