Question

Citation Builders, In., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10-20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $19 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: 2018 2019 $9,025,000 4,275,000 9,500,000 8,090,000 2020 Costs incurred during the year Estimated costs to complete as of year-end Billings during the year Cash collections during the year 3,800,000 11,400,000 1,900,000 1,710,000 $4,275,000 7,600,000 9,200,000 Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $800,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $800,000 each by the buyers. The completed homes cost $600,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $3,600,000. Required: 1. Which method is most equivalent to recognizing revenue at the point of delivery? 2. Answer the following questions assuming that Citation uses the completed contract method for its office building contracts: 2-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 2-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 2-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (lgnore cash.)

Answer 1

Answer:

As per the given Question

1. For recognizing the revenue at the point of delivery, completed contract method is best method no of accounting. This is due to the fact that under completed contract method, the revenue is recognized only when the construction is completed and sold to the customer.

2a. In relation to office building contract Citation will not book it's revenue unless and until the project is fully completed and sold. Therefore, no revenue will be booked by Citation.

2b. Since no revenue is booked in the year 2018 & 2019, related expenses will be also be not recorded and will be deferred by Citation. Therefore, no gross profit or loss will be recorded

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