In: Accounting
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.
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