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Exercise 6-23 (Static) Income (loss) recognition; Long-term contract; revenue recognition over time vs. upon project completion [LO6-9] Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2021 and was completed in 2023. The following is a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars.

Situation 1 2 3 4 Costs Incurred During Year 2021 2022 2023 1,500 2,100 900 1,500 900 2,400 1,500 2,100 1,600 500 3,000 1,000

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Answer #1

FOR 2021

SITUATION COST INCURED DURING THE YEAR [A] ESTIMATE COST TO COMPLETE [B] TOTAL COST INCURED [C=A+B] % OF COMPLETION [D= A/C *100 TOTAL CONTRACT REVENUE [E] GROSS MARGIN [F=E-C GROSS PROFT RECOGNIZED [G = F*D]
1 1,500,000 3,000,000 4,500,000 33.33% 5,000,000 500,000 166,667
2 1,500,000 3,000,000 4,500,000 33.33% 5,000,000 500,000 166,667
3 1,500,000 3,000,000 4,500,000 33.33% 5,000,000 500,000 166,667
4 500,000 3,500,000 4,000,000 12.50% 5,000,000 1,000,000 125,000
5 500,000 3,500,000 4,000,000 12.50% 5,000,000 1,000,000 125,000
6 500,000 4,600,000 5,100,000 9.80% 5,000,000 (100,000) (100,000)

FOR 2022

SITUATION COST INCURED DURING THE YEAR [A] ESTIMATE COST TO COMPLETE [B] TOTAL COST INCURED [C=A+B] % OF COMPLETION [D= A/C *100 TOTAL CONTRACT REVENUE [E] GROSS MARGIN [F=E-C GROSS PROFT RECOGNIZED [G = F*D] GROSS PROFIT ALREADY RECOGNIZED [H] GROSS PROFIT / (LOSS) RECOGNIZED [I=G-H
1 3,600,000 900,000 4,500,000 80% 5,000,000 500,000 400,000 166,667 233,333
2 2,400,000 2,400,000 4,800,000 50% 5,000,000 200,000 100,000 166,667 (66,667)
3 3,600,000 1,500,000 5,100,000 70.59% 5,000,000 (100,000) (100,000) 166,667 (266,667)
4 3,500,000 875,000 4,375,000 80% 5,000,000 675,000 500,000 125,000 375,000
5 3,500,000 1,500,000 5,000,000 70% 5,000,000 0 0 125,000 (125,000)
6 3,500,000 1,700,000 5,200,000 67.31% 5,000,000 (200,000) (134,615) (100,000) (100,000)

FOR 2023

SITUATION COST INCURED DURING THE YEAR [A] TOTAL CONTRACT REVENUE [B] GROSS MARGIN[C=B-A] GROSS PROFIT TO BE RECOGNIZED[D=C] GROSS PROFT ALREADY RECOGNIZED [E ] GROSS PROFIT ALREADY RECOGNIZED [F] TOTAL GROSS PROFIT [G=E+F] GROSS PROFIT [H=C-G]
1 4,500,000 5,000,000 500,000 500,000 166,667 233,333 400,000 100,000
2 4,800,000 5,000,000 200,000 200,000 166,667 (66,667) 100,000 100,000
3 5,200,000 5,000,000 (200,000) (200,000) 166,667 (266,667) (100,000) (100,000)
4 4,500,000 5,000,000 500,000 500,000 125,000 375,000 500,000 0
5 4,800,000 5,000,000 200,000 200,000 125,000 (125,000) 0 200,000
6 5,300,000 5,000,000 (300,000) (300,000) (100,000) (100,000) (200,000) (100,000)

FINAL ANSWER

GROSS PROFIT /(LOSS) RECOGNIZED

SITUATION Revenue Recognized overtime Revenue Recognized upon completion
2021 2022 2023 2021 2022 2023
1 166,667 233,333 100,000 0 0 500,000
2 166,667 (66,667) 100,000 0 0 200,000
3 166,667 (266,667) (100,000) 0 (100,000) (100,000)
4 125,000 375,000 0 0 0 500,000
5 125,000 (125,000) 200,000 0 0 200,000
6 (100,000) (100,000) (100,000) (100,000) (100,000) (100,000)

bracket shows loss

hope you got the answer

Thankyou and all the best for future

PLEASE UPVOTE...

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