Question

Franklin Construction entered into a fixed-price contract to build a freeway-connecting ramp for $42 million. Construction costs incurred in the first year were $32 million and estimated remaining costs to complete at the end of the year were $21 million. How much gross profit or loss will Franklin recognize in the first year if it recognizes revenue over time according to percentage of completion method? (Enter your answer in millions.) million How much gross profit or loss will Franklin recognize in the first year applying the completed contract method? (Enter your answer in millions.) million

Answer 1

Under precentage of Completion	Gross loss	$11million
Under completed contract	Gross loss	$11 million

As per GAAP and standards there are two way of recognising revenue from contract

1) Percentage of completion method : In this method revenue is recognised on the basis of completion of contract ie cost of completion which is incured to the total cost of completion estimated to be incurred.

2) Completed contract method : Revenue is recognised in this method only when the contract is completed . Nothing will be recognise until contract is fully completed.

But If there is an expectation of a loss on a contract, record it at once even under the completed contract method; do not wait until the end of the contract period

Contract cost incurred till 1st year	$32
Estmated Cost to be incurred	$21
Cost of completion	$53

% of completion till 1st year = cost incurred till date / Total Cost of completion

=$(32/53)×100

=60.3773%

Revenue to recognised 1st year based on % Completion	42×60.3773%	25.3585
Less : Cost incurred till date		32
Gross Loss		6.6415

Gross loss on completion 42-53 = 11

As the loss is expected in contract whole loss will be recognized as expense immediately based on prudence principle .

And it there will be a profit it will be recognise based on completion .

2) As there is estmiated gross loss on completion of contract 11 million under completion method whole loss will be recognised in 1st year only .

and if there were a profit it will be recognise only on completion in 2nd year and no profit will be recognise in 1st year.