Question

1.Hometown Construction Corp. entered into a long-term contract to build an office building for Outsider Corp. at a fixed contract price of $27.5 million on 6/15/2016. Construction of the building is completed on 12/15/2018. Hometown Construction expects the building to be completed in two and a half years and uses the Percentage of Completion Method (cost to cost approach) to account for the contract. Cost information related to the contract are as follows: 2016 2017 2018 Actual Construction costs incurred during year Estimated costs to complete at 12/31 20,500,000 4,500,000 12,075,0009,425,000 8,925,000 0 A. B. C. Determine the amount of Gross Profit that would be recognized each year under Percentage of Completion. What amount of Gross Profit would be recognized in 2017 if the estimated costs to complete were $11,000,000? What would be the amount of Gross Profit recognized each year if the completed Contract Method were used instead?

Answer 1

Ques 1 Actual cost to date Estimated Costs (4500000+20500000) 4500000+12075000+8925000 % Completion 2016 2017 | (4500000-12075 000) 2018 4500000/ 18% 65% 100% Project Completes this vear 2016 2018 Year Contract price 2017 27,500,000$27,500,000 $ 27,500,000 26,000,000 26,000,000 1,500,000 Actual Cost to date Estimated costs to complete Total estimated costs 4,500,000$16,575,000 $ 20,500,000$8,925,000 $ 25,000,000$25,500,000 $ Estimated gross (actual in 2018) proft 2,500,000$2,000,000 $ 2016 Revenue Recognition Contract price(A) Percentage Completion(B) Cumulative revenue(A B Less:Revenue already recognised Construction Revenue Less:Actual Costs Gross Profit/loss) 2017 2018 27,500,000$27,500,000 $ 27,500,000 18% 65% 100% 4,950,00017,875,000 $ $(4,950,000) $ 4,950,00012,925,000 $ 4,500,000) $ (12,075,000)|$ 850,000 $ 27,500,000 (17,875,000) 9,625,000 9,425,000) 200,000 450,000 $