Question

Measuring income from long-term contracts. On January 1, 2017 assume that Turner Construction Company agreed to construct an observatory for Dartmouth College for $120 million. Dartmouth college must pay $60 million upon signing and $30 million in 2018 and 2019. Expected construction costs are $10 million for 2017, $60 million for 2018, and $30 million for 2019

REQUIRED:

a.) Indicate the amount and nature of income (revenue and expense) that Turner would recognize during 2017, 2018, and 2019 if it uses the completed-contract method. Ignore income taxes.

b.) Repeat requirement a using the percentage-of-completion method

c.) Indicate the balance in the Construction in Process account on December 31, 2017, 2018, and 2019, (just prior to completion of the contract) under the completed-contract and the percentage-of-completion methods.

Answer 1

Before start answering the above Question let me update about Revenue recognition method in case of Long construction contract . As per new Accounting standard relates to revenue recognition , we need to recognised revenue on POCM basis . POCM full form is Percentage of Completion Method . As per new standard , we used to follow Input and output method to recognising revenue . As per new standard , we can recognising POCM based on Effort as well as Cost .

Below we explain revenue recognition on the basis of POCM method under different stage wise.

We have derived cost incurred till date/ total estimated cost for this project = POCM on the basis of Cost

above POCM cost % we will apply on revenue to recognised the same year wise .

Percentage Completion Method
based on % of cost complete
2017
Cost incurred ($ Mio)	10
Total Cost to complete this contract( $ MIO)	100
% cover	10%
Revenue Recognised
( based on % of cost cover basis)-$ Mio	12	( Revenue * Cost cover%)
Cost incurred -$ Mio	10
Margin-$ Mio	2
2018
Cost incurred ($ Mio)	60
Total Cost to complete this contract( $ MIO)	100
% cover	60%
Revenue Recognised
( based on % of cost cover basis)-$ Mio	72	( Revenue * Cost cover%)
Cost incurred -$ Mio	60
Margin-$ Mio	12
2019
Cost incurred ($ Mio)	30
Total Cost to complete this contract( $ MIO)	100
% cover	30%
Revenue Recognised
( based on % of cost cover basis)-$ Mio	36	( Revenue * Cost cover%)
Cost incurred -$ Mio	30
Margin-$ Mio	6

Complete Contract method - This method of revenue recognition still allow under USGAAP . IFRS not allowing this principle to recognised revenue .

Under Complete contact method , revenue and cost will recognised at the end of the contract .

2017 - Cost incurred - $ 10 MIo

2018 - cost incurred $ 60 Mio -- Accumulated cost incurred - $ 70

2019 - cost incurred $ 30 Mio - Total cost till end of the contract - $ 100 Mio

Contract end revenue recognised - $ 120 Mio

Margin will be at the end of the Contract - $ 120 Mio -$ 100 Mio = $ 20 Mio