Question

Curtiss Construction Company, Inc., entered into a fixed price contract with Axelrod Associates on July 1, 2021, to construct a four-stor office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,240,000. The building was completed on December 31, 2023. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows: At 12-31-2021 At 12-31-2022 At 12-31-2023 $ Percentage of completion Costs incurred to date Estimated costs to complete Billings to Axelrod, to date 103 363.000 3,267,000 724,000 6ex $2.688.00 1,792,000 1,792,00 2,250,000 100% $4,534,000 4,240,000 Required: 1. Compute gross profit or loss to be recognized as a result of this contract for each of the three years, Curtiss concludes that the contract does not qualify for revenue recognition over time 2. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute gross profit or loss to be recognized in each of the three years 3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2021 and 2022 as either cost in excess of billings or billings in excess of costs

Answer 1

1) Under completed-contract method, all are same as in % of completion method except for recognizing gross profit over contract's total tenure. That is, gross profit (or gross loss, if any) is recognized each year based on % of completion of total contract under percentage-of-completion method whereas total gross profit (loss) is recognized at the last year of the contract under completed-contract method as does not qualify for revenue recognition over time. Therefore, 2021 $724,000 2022 $1,526,000 2023 $1,990,000 [2022=$2250000-$724000; 2023=$4240000-$2250000] Billings during the year 2021 $363,000 $363,000 $3,267,000 $3,630,000 Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2022 $2,325,000 $2,688,000 $1,792,000 $4,480,000 2023 $1,846,000 [2022=$2688000-$363000; 2023=$4534000-$2688000] $4,534,000 $0 $4,534,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) when negotiated $4,240,000 [$724000 + $1526000 + $1990000] $4,534,000 [As calculated above] -$294,000 --> To be recognized when the contract is completed in 2023 2021 $0 2022 $0 That is, Revenue to recognize (based on completed contract) Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized 2023 $4,240,000 $4,534,000 -$294,000 $0 $0

2) When revenue and gross profit (loss) is recognized each year based on percentage of completion, difference between total contract price and estimated total cost shall be considered as gross profit (loss) and the same shall be recognized over contract's economic period based on % of completion calculated with respect to costs. 2021 2022 2023 Billings during the year $724,000 $1,526,000 $1,990,000 (2022=$2250000-$724000; 2023=$4240000-$2250000] Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete as of year-end Estimated total costs 2021 $363,000 $363,000 $3,267,000 $3,630,000 2022 $2,325,000 $2,688,000 $1,792,000 $4,480,000 2023 $1,846,000 [2022=$2688000-$363000; 2023=$4534000-$2688000] $4,534,000 $0 $4,534,000 Therefore, % of completion 10.00% 60.00% 100.00% [For 2021: $363000 / $3630000 = 10%; For 2022: $2688000 / $4480000 = 60%; For 2023: $4534000 / $4534000 = 100%] Contract price of this project Less: Cumulative cost to date till 2020 This contract's estimated gross profit (loss) when negotiated $4,240,000 [$724000 + $1526000 + $1990000] $4,534,000 (As calculated above] $294,000 --> Spread over 3 years of contract as below

Contract value completed Less: Revenue recognized already till last year Revenue to recognize (based on % of completion) Less: Cost incurred during the year Gross Profit (Loss) to be recognized 2021 $424,000 $0 $424,000 $363,000 $61,000 2022 $2,544,000 $424,000 $2,120,000 $2,325,000 $205,000 2023 $4,240,000 ($4240000 x 10%; $4240000 x 60%; $4240000 x 100%] $2,544,000 (Ref: Above line] $1,696,000 $1,846,000 (Given] $150,000 3) Balance Sheet (Partial) 2021 Current Liabilities: Billings in excess of costs $361,000 [$724000 - $363000] 2022 Balance Sheet (Partial) Current Liabilities: Costs in excess of billings ($438,000) ($361000 + ($1526000 - $2325000)]