Question

On July 1, 2017, Headland Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,890,000. On July 1, Headland estimated that it would take between 2 and 3 years to complete the building. On December 31, 2019, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2017, 2018, and 2019.

		At 12/31/17		At 12/31/18		At 12/31/19
Contract costs incurred to date		$312,900		$1,148,400		$2,076,000
Estimated costs to complete the contract		1,177,100		831,600		–0–
Billings to Gumbel		300,000		1,090,000		1,850,000

(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore income taxes.) (If answer is 0, please enter 0. Do not leave any field blank. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

			2017	2018	2019
	Revenue for the year		3,96,900	6,99,300	7,93,800
	Costs incurred during the year		3,12,900	8,35,500	9,27,600
	Gross profit/ (loss)		84,000	-1,36,200	-1,33,800
	Costs incurred during the year		3,12,900	8,35,500	9,27,600
	Costs incurred in prior years		-	3,12,900	11,48,400
A	Total costs icurred		3,12,900	11,48,400	20,76,000
	Total costs:
	Costs incurred in prior years		-	3,12,900	11,48,400
	costs incurred during the year		3,12,900	8,35,500	9,27,600
	estimated cost to complete		11,77,100	8,31,600	-
B	Total contract costs		14,90,000	19,80,000	20,76,000
C=A/B *100	Percentage of completion		21%	58%	100%
D	Contract amount		18,90,000	18,90,000	18,90,000
E=C*D	Revenue earned		3,96,900	10,96,200	18,90,000
	Less: revenue recognised in earlier years		-	3,96,900	10,96,200
	Revenue for the year		3,96,900	6,99,300	7,93,800

Normally amount of profit or loss should have been above mentioned amounts.

SInce, in 2018 it is estimated to have = 1,890,000 - 1,980,000 = 90,000 loss it is recognized in 2018 itself. Thus, total loss recognized in 2018 = 90000+84000 (reversal of previous year profit) = 174,000

In 2019 loss recognized = 2,076,000 - 1,980,000 = 96,000