Question

King Corporation started the construction of a building during 2017 at a contract price of $5,000,000. The contract to build was non-cancellable and they managed to complete the project in 2019 as anticipated. Billings are nonrefundable and under the terms of the project, King sends billings to the vendor as revenues are earned. The following additional information is available:

2017 2018 2019

Costs to-date $ 800,000 $2,500,000 $4,800,000

Estimated costs to complete $2,400,000 $2,500,000 $0

Required:

a. Calculate the amount of revenue to be recognized each year using the percentage of completion method. (2017, 2018 & 2019)

b. Calculate the amount of gross profit/loss that should be recognized (2017, 2018 & 2019) each year using the percentage-of-completion method

c. What is the amount of gross profit/loss that should be recognized each year under the completed-contract method?

Answer 1

a)

	2017	2018	2019
cost to date [A]	800000	2500000	4800000
Estimated cost to complete [B]	2400000	2500000	0
Total cost [C] = [A+B]	3200000	5000000	4800000
% Of completion [ A/C]	800000/3200000 .25 OR 25%	2500000/5000000 .50 OR50%	100%

a)

	2017	2018	2019
Total Revenue to be recognized till date [Total contract revenue * % of completion]	5000000*25%= 1250000	5000000*50% =2500000	5000000*100%= 5000000
less:Revenue recognized in prior year/period	0	-1250000	-2500000
Revenue to be recognized in current period	1250000	1250000	2500000

b)

	2017	2018	2019
Revenue recognized in current period	1250000	1250000	2500000
less:cost incurred during the current period	-800000	-1700000 [2500000-800000]	-2300000   [4800000-2500000]
Gross profit	450000	-450000	200000

*:cost incurred during the current period =Total cost incurred till date - cost incurred till prior period.

c)In case of completed contract method ,revenue is recognized only at time of completion of contract.

	2017	2018	2019
Gross profit and loss	0	0	5000000-4800000=200000