Question

A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million.

The building was completed during the second year. Construction costs incurred during the second year were $10 million.

How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?

Answer 1

Under completed-contract method, all are same as in % of completion method except for recognizing gross profit over contract's total tenure. That is, gross profit (or gross loss, if any) is recognized each year based on % of completion of total contract under percentage-of- - completion method whereas total gross profit (loss) is recognized at the last year of the contract under completed-contract method as it does not qualify for revenue recognition over time. Therefore, Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete Total contract costs Year-1 Year-2 $6,000,000 $10,000,000 $6,000,000 $16,000,000 [Year-2=$6000000 + $10000000 = $16000000] $9,000,000 $0 $15,000,000 $16,000,000 Contract price of this project Less: Cumulative cost to date till This contract's estimated gross profit (loss) $20,000,000 -$16,000,000 [As calculated above] $4,000,000 --> To be recognized when the contract is completed in Year-2 That is, Revenue to recognize Less: Cumulative cost to date till Gross Profit (Loss) to be recognized Year-1 Year-2 $0 $20,000,000 $16,000,000 $0 $4,000,000