Question

Chapter 06 0 Saved Help Save & Exit Submit Check my work 10 Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2021, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,720,000. The building was completed on December 31, 2023. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows: 3 points eBook Print Percentage of completion Costs incurred to date Estimated costs to complete Billings to Axelrod, to date At 12-31-2021 10% $ 371,000 3,339,000 732,000 At 12-31-2022 At 12-31-2023 60% 100% $3,024,000 $5, 102,000 2,016,000 0 2,410,000 4,720,000 Required: 1. Compute gross profit or loss to be recognized as a result of this contract for each of the three years. Curtiss concludes that the contract does not qualify for revenue recognition over time. 2. Assuming Curtiss recognizes revenue over time according to percentage of completion, comput gross profit or loss to be recognized in each of the three years. 3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2021 and 2022 as either cost in excess of billings or billings in excess of costs.

Answer 1

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 does not qualify for revenue recognition over time. Therefore, 2021 $732,000 Billings during the year 2022 2023 $1,678,000 $2,310,000 (2022 = $2410000 - $732000 = $1678000; 2023 = $4720000 - $2410000 = $2310000] Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete Estimated total costs $371,000 $371,000 $3,339,000 $3,710,000 $2,653,000 $2,078,000 [2022=$371000-$371000=$2653000; 2023=$5102000-$3024000=$2078000] $3,024,000 $5,102,000 $2,016,000 $0 $5,040,000 $5,102,000 Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $4,720,000 ($732000 + $1678000 + $2310000] -$5,102,000 [As calculated above] -$382,000 --> To be recognized when the contract is completed in 2023 2022 2023 2021 $0 That is, Revenue to recognize Less: Cumulative cost to date till 2023 Gross Profit (Loss) to be recognized $0 $4,720,000 $5,102,000 $0 -$382,000 $0

2) 2021 $732,000 Billings during the year 2022 2023 $1,678,000 $2,310,000 [2022 = $2410000 - $732000 = $1678000; 2023 = $4720000 - $2410000 = $2310000] Costs incurred during the year Cumulative Costs to date Add: Estimated costs to complete Estimated total costs $371,000 $371,000 $3,339,000 $3,710,000 $2,653,000 $2,078,000 [2022=$3024000-$371000=$2653000; 2023=$5102000-$3024000=$2078000] $3,024,000 $5,102,000 $2,016,000 $0 $5,040,000 $5,102,000 Therefore, % of completion 10% 60% 100% [For 2021: $371000 / $3710000 = 10%; For 2022: $3024000 / $5040000 = 60%; For 2023: $5102000 / $5102000 = 100%] Contract price of this project Less: Cumulative cost to date till 2023 This contract's estimated gross profit (loss) $4,720,000 $732000 + $1678000 + $23100001 $5,102,000 [As calculated above] -$382,000 --> Spread over 3 years of contract as below Contract value completed Less: Revenue recognized already till last year Revenue to be recognized Less: Cost incurred during the year Gross Profit (Loss) to be recognized 2021 2022 2023 $472,000 $2,832,000 $4,720,000 [$4720000 x 10%; $4720000 x 60%; $4720000 x 100%] $0 $472,000 $2,832,000 (Ref: Above line] $472,000 $2,360,000 $1,888,000 (based on % of completion) -$371,000 $2,653,000 $2,078,000 [As calculated above] $101,000 -$293,000 -$190,000

3) Curtiss Construction Company, Inc. Balance Sheet (Partial) Dec. 31, 2021 Dec. 31, 2022 Current Assets: Costs in excess of billings $614,000 [2022 = $3024000 - ($732000 + $1678000) = $614000] Current Liabilities: Billings in excess of costs $361,000 [2021 = $732000 - $371000 = $361000]