Question

*P18.11 (LO 5, 6, 7) Excel (Long-Term Contract with an Overall Loss) On July 1, 2020, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2022, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2020, 2021, and 2022. At 12/31/20 At 12/31/21 At 12/31/22 Contract costs incurred to date $ 300,000 $1,200,000 $2,100,000 Estimated costs to complete the contract 1,200,000 800,000 -0– Billings to Gumbel 300,000 1,100,000 1,850,000 Instructions a. Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2020, 2021, and 2022. (Ignore income taxes.) b. Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2020, 2021, and 2022. (Ignore income taxes.)

Answer 1

a) Percentage of completion method

	2020	2021	2022
Cost to date	300000	1200000	2100000
Estimated cost to complete	1200000	800000	0
Percentage completion	20%	60%	100%
Revenue recognized	1900000*20% = 380000	1140000	1900000
Cost to date	-300000	-1200000	-2100000
Gross profit	-80000	-60000	-200000
Profit recognized in previous year	0	80000	60000
Profit (loss) this year	-80000	20000	-140000

b) completion method

	2020	2021	2022
Cost to date	0	0	2100000
Estimated cost to complete	0	0	0
Percentage completion	0	0	100%
Revenue recognized	0	0	1900000
Cost to date	0	0	-2100000
Gross profit	0	0	-200000