Question

Indiana Co. began a construction project in 2016 with a contract price of $150

million to be received when the project is completed in 2018. During 2016, Indiana

incurred $36 million of costs and estimates an additional $84 million of costs to

complete the project. Indiana recognizes revenue over time and for this project

recognizes revenue over time according to the percentage of the project that has

been completed.

Suppose that, in 2017, Indiana incurred additional costs of $63.75 million and

estimated an additional $42.75 million in costs to complete the project. What profit

or loss will Indiana record for 2017?

Answer 1

For Long term construction contracts, under percentage of completion method, the Project gain is
recognized over the project period based on the proportion of costs incurred to date to the Estimated costs
of the project.
			(Figures in millions)
Particulars	2016	2017	Calculation
A. Costs incurred to date	$      36.00	$ 99.75	Given for 2016; For 2017, costs of 2016 and additional costs of 2017 ie. 36 plus 63.75 gives the cost incurred till date
B. Estimated costs to complete	$      84.00	$ 42.75	Given
C. Estimated total cost	$    120.00	$ 142.50	A plus B
D. % Complete	30.00%	70.00%	A / C
E. Cost incurred during the year	$      36.00	$ 63.75	Given
F. Project Revenue	$    150.00	$ 150.00	Given
G. Revenue to be recognized during the year	$      45.00	$ 60.00	For 2016, Project revenue * Percent complete ie. D*F; For 2017, it is D*F minus revenue already recognized till 2016 ie.45
	(150*30%)	(150*70%)-45
K. Profit or (loss) recognized	$         9.00	$ (3.75)	G-E
Thus, loss of $ 3.75 million will be recognized by Indiana for 2017 with respect to this project.