Question

In: Accounting

Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2018,...

Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2018, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $5,080,000. Curtiss concludes that the contract does not qualify for revenue recognition over time. The building was completed on December 31, 2020. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:

At 12-31-2018 At 12-31-2019 At 12-31-2020
Percentage of completion 10 % 60 % 100 %
Costs incurred to date $ 377,000 $ 3,276,000 $ 5,528,000
Estimated costs to complete 3,393,000 2,184,000 0
Billings to Axelrod, to date 738,000 2,530,000 5,080,000


Required:
1.
Compute gross profit or loss to be recognized as a result of this contract for each of the three years.
2. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute gross profit or loss to be recognized in each of the three years.
3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2018 and 2019 as either cost in excess of billings or billings in excess of costs.
  

Solutions

Expert Solution

1. Since the cutiss construction company contract does not qualify for revenue recognition over time it will apply completed contract method which states the revenue and cost will be recognised in the year in which contract is completed, so in the given case contract is completed in year 2020, hence revenue and cost will be recognized in year 2020.

Table showing gross profit or loss to be recgnized each year as per completed contract method

Particulars Year. 2018 Year 2019 Year 2020
Revenue Nil Nil $5,080,000
Cost Nil Nil $5,582,000
Gross profit/Loss Nil Nil -$ 502,000

Loss of $ 502,000 to be recognised in year 2020 and no profit or loss to be recognised in year 2018 & 2019.

2.

Table showing gross profit or loss to be recgnized each year as per percentage of completion method in $

Particulars Year. 2018 Year 2019 Year 2020
Revenue 564,444 2,419,622 $2,095,934
Cost 377,000 3,104,066 $2,046,934
Gross profit/Loss 187,444 -684,444 49,000

As per percentage of completion method revenue is to be recognised as % of the cost incurred to the total cost estimated.

As per percentage of completion method revenue to be recognised is calcualted as follows-

Cost incurred till date/Cost expected to complete the contract*Total revenue

In year 2018 cost incurred is 377,000 and cost estimated to be incurred is $ 3,393,000 & total revenue is 5,080,000

Revenue to be recognised in year 2018 is equal to 377,000/3,393,000*5,080,000=$ 564,444

In year 2019 cost incurred till date is 3,276,000 & cost estimated to be incurred is 3,393,000+2,184,000=5,577,000

Revenue to be recognised in year 2019 is 3,276,000/5,577,000*5,080,000=2,984,066

Revenue already recognised is 564,444 revenue to recognise is=2,984,066-564,444=2,419,622

Now since total cost is 5,577,000 to be incurred over contract and revenue is 5,080,000 loss of 497,000 is to be recognised in year 2019 and since we already recongise a profit of 187444 in year 2018 cost to be recognize this year should be equal to bring a loss of 684,444 that is 2,419,622+ 684,444= 3,104,066

Now in year 2020 cost incurred is 5,528,000 so remaining cost recognised is 5,528,000-3,104,066-377,000=2,046,934

Revenue is 5,080,000 so remaining revenue to be recognised in year 2020 is 5,080,000-2,419,622-564,444=2095934

Gross profit in 2020 is 2095934-2046934=49000

3. Table showing amount shown in 2018 & 2019 cost in excess of billings or billings in excess of cost

Particulars year 2018 year 2019
Current assest
Current Liability 173,556 283,934

In year 2018 revenue recognised is 564,444 and the amount billed to customer is 738,000, so we have actually billed the customer for more than the revnue recognised this create a liability of $ 738,000-564,444=173,556

In year 2019, revenue recognised is 2,419,622 and amount billed is 2,530,000=110378 and the amount of 173556 accumulated last year so total is 283,934


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