Question

Fill in the blank with a number by the accrual method of accounting based on the following information about a construction company.

What is the amount of revenues ($) on the income statement of March 31st?

Company's total assets and liabilities by the end of February

• Total Assets (Cash only): $1,084,009
• Total Liabilities: $155,823

Construction project

• Contract terms
  • Duration: 3/1 ~ 12/31
  • Contract amount:
    • $512,936 with the owner
    • $470,443 with the subcontractors including the suppliers
  • Terms of payment:
    • Monthly payment
    • The owner pays the contractor within a month after the contractor bills the owner.
    • The owner holds 10% of each payment to the contractors for retention.
    • The contractor pays the subcontractors within a month after the subcontractors bill the contractor.
    • The contractor holds 10% of each payment to the subcontractors for retention.

Information related to revenues and expenses in the project

1. 3/1 Project Start
2. 3/26 The subcontractors billed $43,703 to the contractor.
3. 3/30 The contractor billed $48,928 to the owner.
4. 4/20 The owner paid 90% of the amount that the contractor billed in March to the contractor. 10% was held for retention.
5. 4/20 The contractor paid 90% of the amount that the subcontractors billed in March to the subcontractors. 10% was held for retention.
6. 4/26 The subcontractors billed $76,007 to the contractor.
7. 4/30 The contractor billed $86,217 to the owner.

Answer 1

Since this is construction contract so the percentage of completion method is to be used to calculate the amount of revenue

The method is in accordance with the accruals concept of accounting, and ensures that the costs incurred on the project are matched to the revenues arising from that project.This method calculates the percentage completion of the project by taking the ratio of costs incurred to date to the total estimated costs, and applies that percentage to the estimated total revenue arising from the project.

Calculation of amount of Revenue on the income statement of 31st March will be as under:

Percentage of Completion Method Calculation

Percentage completion = Costs to date / Estimated total costs

Percentage completion = 43703/470443

Percentage completion = 9.29%

Having calculated the percentage of completion, the next step is to apply this percentage to the estimated total revenue from the project.

Revenue Recognition

Revenue recognized = % of completion x Total estimated revenue

Revenue recognized = 9.29% x 512936

Revenue recognized = 47651

Income Recognition

The income recognized can now be calculated as follows:

Income recognized = Revenue recognized - Costs to date

Income recognized = 47651 - 43703

Income recognized = 3948