In: Accounting
Sweet Construction Company began operations on January 1, 2020. During the year, Sweet Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Sweet estimated that it would take 5 years to complete the facility at a total cost of $4,517,000. The total contract price for construction of the facility is $6,047,000. During the year, Sweet incurred $1,067,800 in construction costs related to the construction project. The estimated cost to complete the contract is $4,271,200. Lundquist Corp. was billed and paid 25% of the contract price. Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2020, and the amount to be shown as “costs and recognized profit in excess of billings” or “billings in excess of costs and recognized profit” at December 31, 2020, under each of the following methods.
(a) Completed-contract method.
1.Gross Profit to be recognize
2.Computation of Billings on Uncompleted Contract in
Excess of
Related Costs under Completed-Contract Method
(b) Percentage-of-completion method.
Computation of Gross Profit to Be
Recognized |
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Part a | Computation of Gross Profit to Be Recognized under Completed Contract Method | ||
No gross profit to be recognized prior to completion of contract. | |||
Computation of Billings on Uncompleted Contract in Excess of Related Costs under Completed-Contract Method | |||
Construction costs incurred during the year | $ 1,067,800 | ||
Partial billings on contract (25% × $6,047,000) | $ (1,511,750) | ||
$ (443,950) | |||
(b) | Contract price | $ 6,047,000 | |
Costs to date | $ 1,067,800 | ||
Estimated costs to complete | $ 4,271,200 | ||
Total | $ 5,339,000 | ||
Estimated profit ($6,047,000 – $5,339,000) | $ 708,000 | ||
% of completion ($1,067,800/$5,339,000) | 20.00% | ||
Gross profit | $ 141,600 |