In: Accounting
Citation Builders,
Inc., builds office buildings and single-family homes. The office
buildings are constructed under contract with reputable buyers. The
homes are constructed in developments ranging from 10–20 homes and
are typically sold during construction or soon after. To secure the
home upon completion, buyers must pay a deposit of 10% of the price
of the home with the remaining balance due upon completion of the
house and transfer of title. Failure to pay the full amount results
in forfeiture of the down payment. Occasionally, homes remain
unsold for as long as three months after construction. In these
situations, sales price reductions are used to promote the
sale.
During 2018, Citation began construction of an office building for
Altamont Corporation. The total contract price is $25 million.
Costs incurred, estimated costs to complete at year-end, billings,
and cash collections for the life of the contract are as
follows:
2018 | 2019 | 2020 | |||||||||
Costs incurred during the year | $ | 5,000,000 | $ | 11,875,000 | $ | 5,625,000 | |||||
Estimated costs to complete as of year-end | 15,000,000 | 5,625,000 | — | ||||||||
Billings during the year | 2,500,000 | 12,500,000 | 10,000,000 | ||||||||
Cash collections during the year | 2,250,000 | 11,150,000 | 11,600,000 | ||||||||
Also during 2018, Citation began a development consisting of 12
identical homes. Citation estimated that each home will sell for
$900,000, but individual sales prices are negotiated with buyers.
Deposits were received for eight of the homes, three of which were
completed during 2018 and paid for in full for $900,000 each by the
buyers. The completed homes cost $675,000 each to construct. The
construction costs incurred during 2018 for the nine uncompleted
homes totaled $4,050,000.
Required:
1.
Which method is most equivalent to recognizing revenue at the point
of delivery?
2. Answer the following questions assuming that
Citation uses the completed contract method for its office building
contracts:
2-a. How much revenue related to this contract
will Citation report in its 2018 and 2019 income statements?
2-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2018 and 2019?
2-c. What will Citation report in its December 31,
2018, balance sheet related to this contract? (Ignore cash.)
3. Answer the following questions assuming that
Citation uses the percentage-of-completion method for its office
building contracts.
3-a. How much revenue related to this contract
will Citation report in its 2018 and 2019 income statements?
3-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2018 and 2019?
3-c. What will Citation report in its December 31,
2018, balance sheet related to this contract? (Ignore cash.)
4. Assume the same information for 2018 and 2019,
but that as of year-end 2019 the estimated cost to complete the
office building is $11,250,000. Citation uses the
percentage-of-completion method for its office building
contracts.
4-a. How much revenue related to this contract
will Citation report in the 2019 income statement?
4-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2019?
4-c. What will Citation report in its 2019 balance
sheet related to this contract? (Ignore cash.)
5. Which method of accounting should Citation
Builders, Inc adopt for its single-family houses?
6. What will Citation report in its 2018 income
statement and 2018 balance sheet related to the single-family home
business (ignore cash in the balance sheet)?
I am interested in 4 c
Answer 1. | |||
The Completed contract method of recognizing revenue and costs on long term construction contract is equivalent to recognizing revenue at the point of delivery. | |||
Answer 2 a & b. | |||
Completed Contract Method | |||
2018 | 2019 | 2020 | |
Cost Incurred each year (A) | 5,000,000 | 11,875,000 | 5,625,000 |
Cost Incurred to date (B) | 5,000,000 | 16,875,000 | 22,500,000 |
Estimated Costs © | 15,000,000 | 5,625,000 | - |
Total Estimated Costs (D = B + C) | 20,000,000 | 22,500,000 | 22,500,000 |
Revenue | - | - | 25,000,000 |
Expenses | - | - | 22,500,000 |
Gross Profit | - | - | 2,500,000 |
Answer 2 c. | |||
Balance Sheet | |||
2018 | 2019 | ||
Current Assets | |||
Accounts receivable | 250,000 | 1,600,000 | |
Cost & Profits > Billings | 2,500,000 | 1,875,000 | |
Answer 3 a & b. | |||
Percentage of Completion Method | |||
2018 | 2019 | 2020 | |
Cost Incurred each year (A) | 5,000,000 | 11,875,000 | 5,625,000 |
Cost Incurred to date (B) | 5,000,000 | 16,875,000 | 22,500,000 |
Estimated Costs © | 15,000,000 | 5,625,000 | - |
Total Estimated Costs (D = B + C) | 20,000,000 | 22,500,000 | 22,500,000 |
% Completed (E = B / D) | 25% | 75% | 100% |
Revenue | 6,250,000 | 12,500,000 | 6,250,000 |
Expenses | 5,000,000 | 11,875,000 | 5,625,000 |
Gross Profit | 1,250,000 | 625,000 | 625,000 |
Balance Sheet | |||
2018 | 2019 | ||
Current Assets | |||
Accounts receivable | 250,000 | 1,600,000 | |
Cost & Profits > Billings | 3,750,000 | 8,750,000 | |
Answer 4 a & b. | |||
Percentage of Completion Method | |||
2018 | 2019 | 2020 | |
Cost Incurred each year (A) | 5,000,000 | 11,875,000 | 5,625,000 |
Cost Incurred to date (B) | 5,000,000 | 16,875,000 | 22,500,000 |
Estimated Costs © | 15,000,000 | 11,250,000 | - |
Total Estimated Costs (D = B + C) | 20,000,000 | 28,125,000 | 22,500,000 |
% Completed (E = B / D) | 25% | 60% | 100% |
Revenue | 6,250,000 | 8,750,000 | 10,000,000 |
Expenses | 5,000,000 | 11,875,000 | 5,625,000 |
Gross Profit | 1,250,000 | (3,125,000) | 4,375,000 |
Answer 4 c. | |||
Balance Sheet | |||
2018 | 2019 | ||
Current Assets | |||
Accounts receivable | 250,000 | 1,680,000 | |
Cost & Profits > Billings | 3,750,000 | 5,000,000 |