Question

P18-9 (LO5,6) EXCEL (Recognition of Profit on Long-Term Contract) Shanahan 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 $600,000 and
will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to
the construction period.
2017 2018 2019
Costs to date $270,000 $450,000 $610,000
Estimated costs to complete 330,000 150,000 –0–
Progress billings to date 270,000 550,000 900,000
Cash collected to date 240,000 500,000 900,000

Instructions
(a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each
year of the construction period.
(b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year
of the construction period.

Answer 1

(a)

Description	2017	2018	2019
Contract price	$        9,00,000	$        9,00,000	$        9,00,000
Costs to date	$        2,70,000	$        4,50,000	$        6,10,000
Estimated costs to complete	$        3,30,000	$        1,50,000
Estimated total costs	$        6,00,000	$        6,00,000	$        6,10,000
Estimated gross profit	$        3,00,000	$        3,00,000	$        2,90,000

2017
Gross profit for 2017
	Costs to date	x	Estimated total gross profit
	Estimated total costs
	Percentage of completion	270000/600000= 45%
Gross profit	$ 1,35,000		(300000*45%)
2018
Gross profit for 2018
	Costs to date	x	Estimated total gross profit	-	Gross profit recognized until the end of the previous year
	Estimated total costs
	=(450000/600000)	x	300000	-	135000
Gross profit	$ 90,000
2019
Gross profit for 2019
	Costs to date	x	Estimated total gross profit	-	Gross profit recognized until the end of the previous year
	Estimated total costs
	=(610000/610000)	x	290000	-	225000
Gross profit	$ 65,000

(b)

2017	Total Contract price =	0
	Total Contract costs =	0
	Total Gross profit       =	0
2018	Total Contract price =	0
	Total Contract costs =	0
	Total Gross profit       =	0
2019	Total Contract price =	$        9,00,000
	Total Contract costs =	$        6,10,000
	Total Gross profit       =	$        2,90,000