Question

Percentage-of-Completion and Completed Contract Methods

Philbrick Company signed a three-year contract to provide sales training to the employees of Elliot Company. The contract price is $1,200 per employee and the estimated number of employees to be trained is 400. The expected number to be trained in each year and the expected training costs follow.

	Number of Employees	Training Costs Incurred
2016	125	$60,000
2017	200	75,000
2018	75	40,000
Total	400	$175,000

Required

For each year, compute the revenue, expense, and gross profit reported assuming revenue is recognized using the following method.
(Do not round until your final answers. Round your answers to two decimal places.)

1. Percentage-of-completion method, where percentage-of-completion is determined by the number of employees trained.

	Revenue	Expense	Gross Profit
2016	$Answer	$Answer	$Answer
2017	$Answer	$Answer	$Answer
2018	$Answer	$Answer	$Answer
Total	$Answer	$Answer	$Answer

2. Percentage-of-completion method, where percentage-of-completion is determined by the costs incurred.

	Revenue	Expense	Gross Profit
2016	$Answer	$Answer	$Answer
2017	$Answer	$Answer	$Answer
2018	$Answer	$Answer	$Answer
Total	$Answer	$Answer	$Answer

3. Completed contract method.

	Revenue	Expense	Gross Profit
2016	$Answer	$Answer	$Answer
2017	$Answer	$Answer	$Answer
2018	$Answer	$Answer	$Answer
Total	$Answer	$Answer	$Answer

Answer 1

Solution :-

1 ) :-

	Number of employees to be trained	Estimated number of employees to be trained under contract	percentage of completion
2016	125	400	= 125 / 400 = 0.3125 = 31.25%
2017	200	400	= 200 / 400 = 0.5000 = 50.00%
2018	75	400	= 75 /400 = 0.1875 = 18.75%

Applying percentage of completion to total contract price .

	Revenue	Expense	Gross profit
2016	= $1,200 * 400 * 31.25% = $480,000 * 31.25% = $150,000	$60,000	= $150,000 - $60,000 = $90,000
2017	= $1,200 * 400 * 50.00% = $480,000 * 50.00% = $240,000	$75,000	= $240,000 - $75,000 = $165,000
2018	= $1,200 * 400 *18.75% = $480,000 *18.75% = $90,000	$40,000	= $90,000 - $40,000 = $50,000
Total	= $150,000 + $240,000 + $90,000 = $480,000	= $60,000 + $75,000 + $40,000 = $175,000	= $480,000 - $175,000 = $305,000

2 ) :-

	Training cost incurred	Total estimated cost to be incurred under contract	percentage of completion
2016	$60,000	$175,000	= $60,000 / $175,000 = 0.3428 = 34.28%
2017	$75,000	$175,000	= $75,000 / $175,000 = 0.4285 = 42.85%
2018	$40,000	$175,000	= $40,000 / $175,000 = 0.2285 = 22.85%

Applying percentage of completion to total contract price .

	Revenue	Expense	Gross profit
2016	= $1,200 * 400 * 34.28% = $480,000 *34.28% = $164,571	$60,000	= $164,571 -  $60,000 = $104,571
2017	= $1,200 * 400 * 42.85% = $480,000 * 42.85% = $205,714	$75,000	= $205,714 - $75,000 = $130,714
2018	= $1,200 * 400 * 22.85% = $480,000 *22.85% = $109,600	$40,000	= $109,600 - $$69,714 = $69,714
Total	= $150,000 + $240,000 + $90,000 = $480,000	= $60,000 + $75,000 + $40,000 = $175,000	= $104,571 + $130,714 + $69,714 = $304,999

3 ) :-

	Revenue	Expense	Gross profit
2016	$0	$60,000	= 0 - $60,000 = - $60,000
2017	$0	$75,000	0 - $75,000 = - $75,000
2018	$480,000	$40,000	= $480,000 - $40,000 = $440,000
Total	= 0 + 0 + $480,000 = $480,000	= $60,000 + $75,000 + $40,000 = $175,000	= $440,000 - $75,000 - $60,000 = $440,000 - $135,000 = $305,000