Question

On June 15, 2021. Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington D.C. for $350 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows (5 in millions): 2021 $ 3e 170 Costs incurred during the year Estimated costs to complete as of December 31 2022 $142 0 2023 $40 Required: 1. Compute the revenue and gross profit will Sanderson report in its 2021 2022, and 2023 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion 2. Compute the revenue and gross profit will Sanderson report in its 2021 2022, and 2023 income statements related to this contract assuming this project does not qualify for revenue recognition over time. 3. Suppose the estimated costs to complete at the end of 2022 are $170 million instead of $80 million Compute the amount of revenue and gross profit or loss to be recognized in 2022 assuming Sanderson recognizes revenue over time according to percentage of completion Answer is not complete. Complete this question by entering your answers in the tabs below.

Answer 1

1	Percentage of completion=Cost incurred during the year/Total estimated cost
	Revenue to be recognized=(Contract price*Percentage of completion)-Revenue already recognized
	Gross profit/(loss) to be recognized=(Estimated gross profit/(Loss) *percentage of completion)-Gross profit already recognized
	Estimated gross profit/(loss)=Contract price-Total estimated costs
				2021	2022	2023
	a) Contract price			350	350	350
	b) Actual cost to date			30	170	210
					(30+140)	(30+140+40)
	c) Estimated costs to complete			170	80	0
	d) Total estimated costs (b)+©			200	250	210
	e) Estimated gross profit/(loss) (a)-(d)			150	100	140
	f) Percentage of completion (b)/(d)			15.00%	68.00%	100.00%
	g) Revenue to be recognized			53	238	350
						(Note:2)
	h) Gross profit/(loss) to be recognized			23	68	140
			Percentages of completion
	Year		Actual cost to date	Divided by	Estimated total costs	=	% complete to date
	2021		30	Divided by	200	=	15.00%
	2022		160	Divided by	200	=	80.00%
	2023		205	Divided by	205	=	100.00%
			Income statement (Partial)
				2021
			To date	Recognized in prior years	Recognized in 2021
			a	b	a-b
	Construction revenue		53	0	53
	Construction expense		30	0	30
	Gross profit (loss)		23	0	23
			Income statement (Partial)
				2022
			To date	Recognized in prior years	Recognized in 2022
			a	b	a-b
	Construction revenue		238	53	185
	Construction expense		170	30	140
	Gross profit (loss)		68	23	45
			Income statement (Partial)
				2023
			To date	Recognized in prior years	Recognized in 2023
			a	b	a-b
	Construction revenue		350	238	112
	Construction expense		210	170	40
	Gross profit (loss)		140	68	72
2	Here,the project does not qualify revenue recognition over time.
	Hence , revenue and gross profit to be recognized at the time of completion of contract
	Year	Revenue recognized	Gross profit (loss) recognized
	2021	0	0
	2022	0	0
	2023	350	140
			350-(30+140+40)
			Income statement (Partial)
				$
	Contract price			350
	Less: Costs to date		(30+140+40)	210
	Gross profit recognized			140
3				2021	2022
	a) Contract price			350	350
	b) Actual cost to date			30	170
					(30+140)
	c) Estimated costs to complete			170	170
	d) Total estimated costs (b)+©			200	340
	e) Estimated gross profit/(loss) (a)-(d)			150	10
	f) Percentage of completion (b)/(d)			15.00%	50.00%
	g) Revenue to be recognized			53	175
	h) Gross profit/(loss) to be recognized			23	5
			Percentages of completion
	Year		Actual cost to date	Divided by	Estimated total costs	=	% complete to date
	2022		170	Divided by	340	=	50.00%
				2022
			To date	Recognized in prior years	Recognized in 2022
			a	b	a-b
	Construction revenue		175	53	122
	Construction expense		170	30	140
	Gross profit (loss)		5	29	-24