Question

Refer to the situation described in BE 6–33. Assume that the building was completed during the second year, and construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?

 

 

Data From BE 6-33

A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The company recognizes revenue over time according to percentage of completion. How much revenue and gross profit or loss will appear in the company’s income statement in the first year of the contract?

Answer 1

Long term contract; revenue recognition upon completion

 

1)

Revenue should be recognized only after completion of second year.

 

2)

 

Calculation of gross profit in second year:

It is given that the fixed price of contract is $20,000,000, construction cost in first year is $6,000,000, and construction cost in second year is $10,000,000.

 

Now, calculate the gross profit in second year:

 

Gross profit in second year = [Fixed price of contract – (Construction cost in first year + Construction cost in second year)]

                                                 = $20,000,000 – ($6,000,000 + $10,000,000)

                                                 = $20,000,000 - $16,000,000

                                                 = $4,000,000

 

Hence, the calculated gross profit in second year is $4,000,000.

Hence, the calculated gross profit in second year is $4,000,000.