Question

Citation Builders, Inc., 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 2021, Citation began construction of an office building for Altamont Corporation. The total contract price is $30 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:

2023 $ 6,750,000 Costs incurred during the year Estimated costs to complete as of year-end Billings during the year Cash collections during the year 2021 $ 6,000,000 18,000,000 3,000,000 2,700,000 2022 $14,250,000 6,750,000 15,000,000 13,700,000 12,000,000 13,600,000

Also during 2021, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $1,000,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2021 and paid for in full for $1,000,000 each by the buyers. The completed homes cost $750,000 each to construct. The construction costs incurred during 2021 for the nine uncompleted homes totaled $4,500,000.

ANSWERS TO 1, 2A, 2B

2-c. What will Citation report in its December 31, 2021, balance sheet related to this contract? (Ignore cash.)

3-a. How much revenue related to this contract will Citation report in its 2021 and 2022 income statements?
3-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2021 and 2022?

3-c. What will Citation report in its December 31, 2021, balance sheet related to this contract? (Ignore cash.)

4-a. How much revenue related to this contract will Citation report in the 2022 income statement?
4-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2022?

4-c. What will Citation report in its 2022 balance sheet related to this contract? (Ignore cash.)

Answer 1

Answer-1:

In case of construction contracts, either completed contracts method can be used or percentage of completion method can be used. Completed contract method allows recognition of revenue on completion of the contract which is equivalent to recognition of revenue on delivery.

Answer-2(a):

Citation will not report any revenue under completed contract method till the time project is complete. Hence in 2021 & 2022 no revenue will be reported.

Answer-2(b):675

As revenue and expenses both are differed till the time of completion, no gross profit or loss will be reported.

Answer-2(c):

Balance Sheet (Partial) At December 31, 2021 Current Assets: Account Receivable $ Construction work in progress 300,000 6,000,000 Current Liabilities: Progress Billing 3,000,000

Answer-3(a):

Cost Year incurred 2021 6,000,000 2022 14,250,000 2023 6,750,000 Estimated cost to complete at year end 18,000,000 6,750,000 Billing 3,000,000 15,000,000 12,000,000 Cash Revenue for collection % completed each year 2,700,000 | 25% 7,500,000 13,700,000 75% 15,000,000 13,600,000 100% 7,500,000

Answer-3(b):

Year Revenue for each year 2021 7,500,000 2022 15,000,000 Cost incurred 6,000,000 14,250,000 Gross Profit 1,500,000 750,000

Answer-3(c):

Current Assets - Account receivable $300,000

Current Assets - NEt Construction in progress - $4,500,000

Year Billing 2021 3,000,000 2022 1 5,000,000 2023. 12,000,000 Cash collection 2,700,000 13,700,000 13,600,000 Account receivable 300,000 1,600,000 Cummulative Cummulative Revenue Cost 7,500,000 3,000,000 22,500,000 18,000,000 30,000,000 30,000,000 Net construction in progress 4,500,000 4,500,000