Question

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $360 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2018			2019			2020
Costs incurred during the year	$	60		$	120		$	70
Estimated costs to complete as of December 31		180			70			—

Required:
1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 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 2018, 2019, and 2020 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 2019 are $140 million instead of $70 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method.

Answer 1

Statement showing computation of Gross Profit recognizze over time assuming percebtage of completion method
Percentages of completion
	Choose numerator	÷	Choose denominator	=	% complete to date
	Actual costs to date		Estimated total costs
2018	$60	÷	$240	=	25.00%
			(60+180)
2019	$180	÷	$250	=	72.00%
	(60+120)		(180+70)
2020					100.00%

2018
	To date (A)	Recognized in prior years (B)		Recognized in 2018 (A-B)
Construction revenue	$90	$0		$90
	(360X25%)
Less: Construction expense	$60	$0		$60
Gross profit (loss)	$30	$0		$30
2019
	To date (A)	Recognized in prior years (B)		Recognized in 2019 (A-B)
Construction revenue	$259	$90		$169
	(360X72%)	Prevoius Year
Less: Construction expense	$180	$60		$120
	(60+120)	Prevoius Year
Gross profit (loss)	$79	$30		$49
2020
	To date (A)	Recognized in prior years (B)		Recognized in 2020 (A-B)
Construction revenue	$360	$259		$101
Less: Construction expense	$250	$180		$70
	(60+120+70)	Prevoius Year)
Gross profit (loss)	$110	$79		$31

2. Statement showing revenue and gross profit assuming this project does not qualify for revenue recognition over time. ( $ in Million)
Year	Revenue recognized		Gross Profit (Loss) recognized
2018	$0		$0
2019	$0		$0
2020	$360		$110
			(360-250)

Part-3 : Computation of Revenue and gross profit or loss to be recognized in 2019 (using the percentage of completion )
Percentages of completion
	Choose numerator	÷	Choose denominator	=	% complete to date
	Actual costs to date		Estimated total costs
2019	$180	÷	320	=	56.25%
2020			(180+140)		100.00%
2019
	To date	Recognized in prior years		Recognized in 2019
Construction revenue	$203	$90		$113
	(360*56.25%)
Less:Construction expense	$180	$60		$120
	(60+120)
Gross profit (loss)	$23	$30		($8)