Question

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $400 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2018			2019			2020
Costs incurred during the year	$	90		$	60		$	80
Estimated costs to complete as of December 31		150			50			—

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time.
3. Suppose the estimated costs to complete at the end of 2019 are $150 million instead of $50 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Answer 1

Solution 1:

Computation of % of completion, revenue recognition and Gross Profit - Sanderson Construction (In Millions)
Year	Actual cost incurred (A)	Total cost incurred till date (B)	Total estimated Cost ( C )	% of completion (D) (B/C)	Contract Price (E)	Total Revenue to be recoganized (F) (E * D)	Revenue for current period (G)	Gross Profit (H) (G - A)
2018	$90	$90	$240	37.50%	$400	$150	$150	$60
2019	$60	$150	$200	75.00%	$400	$300	$150	$90
2020	$80	$230	$230	100.00%	$400	$400	$100	$20

Solution 2:

Computation of Gross Profit - Revenue on completion - Sanderson Construction (In Millions)
Year	Actual cost incurred (A)	Total cost incurred till date (B)	Total estimated Cost ( C )	Contract Price (D)	Revenue Recognized	Gross Profit
2018	$90	$90	$240	$400	$0	$0
2019	$60	$150	$200	$400	$0	$0
2020	$80	$230	$230	$400	$400	$170

Solution 3:

Computation of % of completion, revenue recognition and Gross Profit - Sanderson Construction (In Millions)
Year	Actual cost incurred (A)	Total cost incurred till date (B)	Total estimated Cost ( C )	% of completion (D) (B/C)	Contract Price (E)	Total Revenue to be recoganized (F) (E * D)	Revenue for current period (G)	Gross Profit (H) (G - A)
2018	$90	$90	$240	37.50%	$400	$150	$150	$60
2019	$60	$150	$300	50.00%	$400	$200	$50	-$10
2020	$80	$230	$230	100.00%	$400	$400	$200	$120

Therefore,

Amount of revenue recognized in 2019 = $50 million

Amount of Gross Profit to be recognized in 2019 = -$10 million