Question

Construction Contract Accounting as per Percentage-of-Completion Method & Completed Contract Method.

 Problem Four: Long-Term Contract

 On July 1, 2020, Torvill Construction Company Inc. contracted to build an office building for Gabriella Corp. for a total contract price of S2,000,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2022, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gabriella for 2020, 2021, and 2022.

 Required:

 a. Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2020, 2021, and 2022.

 b. Using the completed-contract method, how much profit or loss will be recognized as a result of this contract for the years ended December 31, 2020, 2021, and 2022.

 

 

Answer 1

Under the Percentage of Completion Method, costs and revenues are recognized for the period based on the stage of completion of the construction process.

	2020	2021	2022
Cost to date (A)	$300,000	$600,000	$1,000,000
Estimated cost to complete (B)	$1,200,000	$400,000	$0
Total Estimated Cost of Project (C= A+B)	$1,500,000	$1,000,000	$1,000,000
Percentage completion (A/C)	20%	60%	100%
Revenue recognized (D)	$400,000	$1,200,000	$2,000,000
Gross Profit (D-A)	$100,000	$600,000	$1,000,000
Profit recognized in previous year	-$0	-$100,000	-$600,000
Profit (loss) this year	$100,000	$500,000	$400,000

** Revenue Recognized is equal to (Percentage of Completion x Contract Price)

where, contract price is given to be $2,000,000.

 

 

 

In Completed Contract Method, all revenues and expenses incurred are deferred to the end of the construction period where the construction process is completed.

 

Only in 2022, will the revenues and expenses be recorded.

	2020	2021	2022
Cost to date (A)	$0	$0	$1,000,000
Estimated cost to complete	$0	$0	$0
Percentage completion	0	0	100%
Revenue recognized (B)	$0	$0	$2,000,000
Gross Profit (B - A)	$0	$0	$1,000,000

Year-End Profits Recognized
	2020	2021	2022
Percentage of Completion Method	$100,000	$500,000	$400,000
Completed-Contract Method			$1,000,000