Question

Ivanhoe Construction Company has entered into a contract beginning January 1, 2017, to build a parking complex. It has been estimated that the complex will cost $599,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $905,000. The following data pertain to the construction period. 2017 2018 2019 Costs to date $257,570 $413,310 $609,000 Estimated costs to complete 341,430 185,690 –0– Progress billings to date 270,000 551,000 905,000 Cash collected to date 240,000 501,000 905,000

Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.

Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period.

Answer 1

• Percentage of completion method

	2017	2018	2019
Gross Profits (Loss)	$131,580	$79,560	$84,860

Working		2017	2018	2019
A	Contract Price	$905,000	$905,000	$905,000
B	Cost Incurred to Date	$257,570	$413,310	$609,000
C	Estimated cost yet to be incurred to complete the contract	$341,430	$185,690	$0
D = B+C	Total Cost	$599,000	$599,000	$609,000
E = (B/D) x 100	% of Completion	43.00%	69.00%	100.00%
F = A x E	Revenue to date	$389,150	$624,450	$905,000
G	Revenue of Previous year	$0	$389,150	$624,450
H = F - G	Net Revenue this year	$389,150	$235,300	$280,550
I (=B)	Cost to date	$257,570	$413,310	$609,000
J	Cost to date of previous year	$0	$257,570	$413,310
K = I - J	Net Cost for the year	$257,570	$155,740	$195,690
L = H - K	Gross Profits	$131,580	$79,560	$84,860

• Completed contract method
  Gross Profits in:
  2017 = $ 0
  2018 = $ 0
  2019 = $ 905000 – 609000 = $ 296,000