Question

Bob Ross Ltd builds large ships and uses the percentage of completion method of revenue recognition. The following information pertains to the construction contracts it had in place as of its December 31, 2012 year-end.

	2011	2012
Cost incurred to date	200 million	400 million
Costs to complete contracts	600 million	600 million
Total price of contracts outstanding at December 31, 2012	1,300 million	1,300 million

4a1) How much revenue will Bob's Construction recognize in 2011?

4a2) How much G.P. will Bob's Construction recognizes in 2012?

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4b) Bob Ltd. entered a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013. A summary of the costs, billings, and collections is provided below:

	2011	2012	2013
Costs incurred during the year	500,000	700,000	1,100,000
Estimated costs to complete at year end	1,500,000	1,200,000	0
Billings during the year	440,000	1,000,000	1,060,000
Cash collections during the year	400,000	900,000	1,200,000

Bob uses the percentage of completion method. What amount would appear as accounts receivable on Bob's December 31, 2012 balance sheet?

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4c) With the same data as 4b, Bob's Construction Ltd. entered a contract to build a new airport terminal for $2,500,000. Construction commenced on August 1, 2011, with a planned completion date of December 31, 2013.  Bob uses the percentage of completion method. How much gross profit would Bob's Construction recognize in 2012?

Answer 1

All amounts are in $

Question 4a)

Assuming that the given "Cost to complete" is total cost and not the estimated further cost.

In 2011, 33.33% of contract is complete (200/600)

In 2012, 66.67% of contract is complete till date (400/600)

4a1)

Revenue recognised in 2011 = 1,800 x 33.33% = 600

4a2)

Revenue to be recognised till 2012 = 1,800 x 66.67% = 1,200

Revenue to be recognised in 2012

= Revenue to be recognised till date - Revenue recognised earlier

= 1,200 - 600

= 600

Gross Profit in 2012 = Revenue recognised in 2012 - Cost incurred in 2012

= 600 - (400-200)

= 400

Question 4b)

Accounts receivable portion must be Billings over Cash receipts

Total Billings in 2011 & 2012 = 1,440,000 (440,000 + 1,000,000)

Total Receipts in 2011 & 2012 = 1,300,000 (400,000 + 900,000)

Accounts Receivable = 1,440,000 - 1,300,000 = 140,000

Question 4c)

Total Costs incurred till date = 500,000 + 700,000 = 1,200,000

Total estimated costs = 1,200,000 + 1,200,000 = 2,400,000

% of completion till end of 2012 = 1,200,000/2,400,000 = 50%

% of completion till end of 2011 = 500,000/(500,000+1,500,000) = 25%

% of revenue to be recognised in 2012 = 50% - 25% = 25%

Revenue recognised in 2012 = 2,500,000 x 25% = 625,000

Costs in 2012 = 700,000

Gross Profit recognised in 2012 = 625,000 - 700,000

= (75,000) (that means a loss of 75,000)