Question

On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2016 2017 2018 Costs incurred during the year $ 70 $ 60 $ 30 Estimated costs to complete as of December 31 130 30 — Compute the revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. Compute the amount of revenue and gross profit or loss to be recognized in 2016, 2017, and 2018 using the completed contract method. Suppose the estimated costs to complete at the end of 2017 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2017 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)
2016	$70	$70	$200	35.00%	$310	$109	$109	$39
2017	$60	$130	$160	81.25%	$310	$252	$143	$83
2018	$30	$160	$160	100.00%	$310	$310	$58	$28

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 to be recognized	Gross Profit
2016	$70	$70	$200	$310	$0	$0
2017	$60	$130	$160	$310	$0	$0
2018	$30	$160	$160	$310	$310	$150

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)
2016	$70	$70	$200	35.00%	$310	$109	$109	$39
2017	$60	$130	$250	52.00%	$310	$161	$53	-$7
2018	$30	$160	$160	100.00%	$310	$310	$149	$119

Therefore amount of revenue to be recognized in 2017 = $53

Profit and loss to be recognized in 2017 = ($7)