Question

On June 15, 2021, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows $ in millions): 2021 $ 70 2022 $60 30 2023 $30 Costs incurred during the year Estimated costs to complete as of December 31 130 Required: 1. Compute the revenue and gross profit will Sanderson report in its 2021, 2022, and 2023 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 2021, 2022, and 2023 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 2022 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2022 assuming Sanderson recognizes revenue over time according to percentage of completion.

Answer 1

1.	Contract price	$310
	Percentage of completion
		Actual cost to date	+	Estimated Total Cost	=	% of completion
	2021	70	+	200	=	35.00%
	2022	130	+	160	=	81.25%
	2023	160	+	160	=	100.00%
		2021
		To date		Recognised in prior years		Recognised in 2021
	Contruction revenue	$108.50		0		$108.50	(310*35%)
	Contruction expense	$70.00		$0.00		$70.00
	Gross profit(loss)	$38.50		$0.00		$38.50
		2022
		To date		Recognised in prior years		Recognised in 2022
	Contruction revenue	$251.88		$108.50		$143.38	(310*81.25%)
	Contruction expense	$130.00		$70.00		$60.00
	Gross profit(loss)	$121.88		$38.50		$83.38
		2023
		To date		Recognised in prior years		Recognised in 2023
	Contruction revenue	$310.00		$251.88		$58.13
	Contruction expense	$160.00		$130.00		$30.00
	Gross profit(loss)	$150.00		$121.88		$28.13
2.	Year	Revenue recognised		Gross profit(loss)recognised
	2021	0		-70
	2022	0		-60
	2023	310		150
3.	Percentage of completion
		Actual cost	/	Estimated Total Cost	=	% of completion to date
	2022	130	/	250	=	52%
		2022
		To date		Recognised in prior years		Recognised in 2023
	Contruction revenue	$161.20		$108.50		$52.70
	Contruction expense	$130.00		$70.00		$60.00
	Gross profit(loss)	$31.20		$38.50		-$7.30