Question

At the beginning of 2013, the Harding Construction Company received a contract to build an office building for $10 million. Harding will construct the building according to specifications provided by the buyer, and the project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows:

	2013		2014		2015
Cost incurred during the year	$2,300,000		$3,600,000		$2,100,000
Estimated costs to complete	5,300,000		2,000,000		0
Billings during the year	1,700,000		4,000,000		4,300,000
Cash collections during the year	1,600,000		3,600,000		4,300,000

  

Calculate the following:

Gross profit recognized:		Percentage of completion Method		Completed contract Method
2013
2014
2015
Total gross profit:

Answer 1

Solution

Gross profit recognized:	Percentage of completion Method	Completed contract Method
2013	$      726,316
2014	$      842,039
2015	$      431,646	$ 2,000,000
Total gross profit	$   2,000,000	$ 2,000,000

Working

Working		2013	2014	2015
A	Contract Price	$ 10,000,000	$ 10,000,000	$ 10,000,000
B	Cost Incurred to Date	$ 2,300,000	$ 5,900,000	$ 8,000,000
C	Estimated cost yet to be incurred to complete the contract	$ 5,300,000	$ 2,000,000	$ 0
D = B+C	Total Cost	$ 7,600,000	$ 7,900,000	$ 8,000,000
E = (D/B) x 100	% of Complition	30%	75%	100%
F = A x E	Revenue to date	$ 3,026,316	$ 7,468,354	$ 10,000,000
G	Revenue of Previous year	$ 0	$ 3,026,316	$ 7,468,354
H = F - G	Net Revenue this year	$ 3,026,316	$ 4,442,039	$ 2,531,646
I	Cost to date	$ 2,300,000	$ 5,900,000	$ 8,000,000
J	Cost to date of previous year	$ 0	$ 2,300,000	$ 5,900,000
K = I - J	Net Cost for the year	$ 2,300,000	$ 3,600,000	$ 2,100,000
L = H - K	Gross Profits	$ 726,316	$ 842,039	$ 431,646

Under completion of contract method no profit will be recognized until completion

In Year 3 total revenue - Total cost = Profit recognized........(10,000,000-8,000,000=$2,000,000 Gross profit)