Question

Rangers Corp. entered into a contract to construct a factory building. The contract price is $10,000,000. Cost information over the life of the contract is as follows: Year 2014 2015 2016 Cost Incurred During Year $2,000,000 3,500,000 1.100.000 Estimated Cost to Complete $5,000,000 1,250,000 0 Rangers uses cost-to-cost to estimate the percentage complete on the contract. Provide the amount of gross profit recognized each year using two alternative revenue recognition methods. Year Completed Contract Method Percentage of Completion Method 2014 2015 2016

Answer 1

Solution

Year	Percentage of completion Method	Completed contract Method
2014	$      857,143
2015	$   1,791,005
2016	$      751,852	$ 3,400,000

Working

Percentage of completion method

Working		2014	2015	2016
A	Contract Price	$ 10,000,000	$ 10,000,000	$ 10,000,000
B	Cost Incurred to Date	$ 2,000,000	$ 5,500,000	$ 6,600,000
C	Estimated cost yet to be incurred to complete the contract	$ 5,000,000	$ 1,250,000	$ 0
D = B+C	Total Cost	$ 7,000,000	$ 6,750,000	$ 6,600,000
E = (D/B) x 100	% of Completion	29%	81%	100%
F = A x E	Revenue to date	$ 2,857,143	$ 8,148,148	$ 10,000,000
G	Revenue of Previous year	$ 0	$ 2,857,143	$ 8,148,148
H = F - G	Net Revenue this year	$ 2,857,143	$ 5,291,005	$ 1,851,852
I	Cost to date	$ 2,000,000	$ 5,500,000	$ 6,600,000
J	Cost to date of previous year	$ 0	$ 2,000,000	$ 5,500,000
K = I - J	Net Cost for the year	$ 2,000,000	$ 3,500,000	$ 1,100,000
L = H - K	Gross Profits	$ 857,143	$ 1,791,005	$ 751,852

.

In completed contract method all the profit will be recorded in the year the contract is completed. Gross profit to be recorded in 2016 will be (10,000000 minus all cost in three years)