Question

Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale.

During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $29 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:

	2018				2019				2020
Costs incurred during the year	$	5,800,000			$	13,775,000			$	6,525,000
Estimated costs to complete as of year-end		17,400,000				6,525,000				—
Billings during the year		2,900,000				14,500,000				11,600,000
Cash collections during the year		2,610,000				13,190,000				13,200,000

Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $980,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $980,000 each by the buyers. The completed homes cost $735,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $4,410,000.

Required:

1. Which method is most equivalent to recognizing revenue at the point of delivery?
2. Answer the following questions assuming that Citation uses the completed contract method for its office building contracts:
2-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements?
2-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019?
2-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.)
3. Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts.
3-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements?
3-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019?
3-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.)
4. Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $13,050,000. Citation uses the percentage-of-completion method for its office building contracts.
4-a. How much revenue related to this contract will Citation report in the 2019 income statement?
4-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019?
4-c. What will Citation report in its 2019 balance sheet related to this contract? (Ignore cash.)
5. Which method of accounting should Citation Builders, Inc adopt for its single-family houses?
6. What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?

Answer 1

Answer:

1. The most equivalent method to recognizing revenue at the point of delivery is Completed contract method.

2.

a. The citation will report no revenue under the completed contract method.

b. For the Altamont contract, gross profit will not be reported until the project is finished. Instead, it will report an overall gross loss. A gross loss will be in accordance with the period the estimates are revised.
Although, there is no estimation that the Altamont contract will earn a gross loss, so it is never recognised.

c. According to the citation report on Dec 31, 2018

	Amount	Calculation
Current Asset
Accounts receivable	$290,000	Billings - Cash collected = 2,900,000 - 2,610,000 = 290,000
Cost in excess of billings	$290,000	Costs - Bills = 5,800,000 - 2,900,000 = 290,000

3.

	Amount
Particulars	2018	2019
Contract Price	$29,000,000	$29,000,000
Cost to date	(5,800,000)	(19,575,000)
Estimated costs to complete	(17,400,000)	(6,525,000)
Total estimated costs	(23,200,000)	(26,100,000)
Estimated gross profit	5,800,000	2,900,000

a. Revenue in 2018                = (5,800,000 / 23,200,000) * $29,000,000

                                                = 25% * $29,000,000

                                                = $ 7,250,000

     Revenue in 2019                = (19,575,000 / 26,100,000) * $29,000,000

                                                = 75% * $29,000,000

                                                = $ 21,750,000

2019 revenue - 2018 revenue = $21,750,000 - $7,250,000 = $14,500,000

b.

Gross profit in 2018 = $7,250,000 - $5,800,000 = $ $1,450,000

Gross profit in 2019 = $14,500,000 - $13,775,000 = $725,000

c.

Balance sheet At Dec 31, 2018
Current assets:	Amount	Calculation
Accounts receivable	$290,000	Same as above
Cost in excess of billings	4,350,000	7,250,000 - 2,900,000