Question

On June 1, 2020, Roman Construction Company Inc. contracted to build an office building for Sicily Corp. for a total contract price of $2,600,000. On July 1, Roman estimated that it would take between 2 and 3 years to complete the building. On December 31, 2022, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Sicily 2020, 2021, and 2022:
	At	At	At
	12/31/2020	12/31/2021	12/31/2022
Contract costs incurred during the year	$   600,000	$ 1,500,000	$ 2,750,000
Estimated costs to complete the contract	1,800,000	1,200,000	-
Billings to Sicily	400,000	1,200,000	2,400,000
Instructions:
(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a
result of this contract for the years ended December 31, 2020, 2021, and 2022. (Ignore income taxes.)
(b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of
this contract for the years ended December 31, 2020, 2021, and 2022. (Ignore income taxes.)

Answer 1

Answer :

(a) Using the percentage-of-completion method :

Particulars	2020	2021	2022
Cumulative Cost Incurred at year End	600,000	1,500,000	2,750,000
Estimated Costs to complete the contract	1,800,000	1,200,000
Total Costs	2,400,000	2,700,000	2,750,000
% of Completion = Cost Incurred / Total Costs	25.00%	55.56%	100.00%
Cost Incurred during the year	600,000	900,000	1,250,000
Particulars	2020	2021	2022
Revenue recognized = 2,600,000 x % of Completion	650,000	1,444,444	2,600,000
Less : Revenue recognized in earlier years	0	650,000	1,444,444
Revenue recognized in current Year	650,000	794,444	1,155,556
Less : Cost Incurred during the year	600,000	900,000	1,250,000
Gross Profit (Loss) during the year	50,000	(105,556)	(94,444)

So,

Particulars	Amount
Gross Profit (Loss) during the year 2020	$50,000
Gross Profit (Loss) during the year 2021	($105,556)
Gross Profit (Loss) during the year 2022	($94,444)

(b) Using the completed-contract method :

Particulars	Amount
Gross Profit (Loss) during the year 2020	$0
Gross Profit (Loss) during the year 2021	$0
Gross Profit (Loss) during the year 2022	($150,000)