Question

Question No. 3 (15 marks)

Napanee Construction Company (NCC) has entered into a non-cancellable contract with Raglan Company to construct a building for $2,100,000. NCC is a public company with a December 31 year-end. NCC has elected to use the Percentage-of-Completion method. The following data are available:

	2018	2019	2020
Construction costs incurred to-date	$ 400,000	$1,600,000	$1,900,000
Estimated costs to completion	1,400,000	450,000	0
Progress Billings to-date	320,000	1,128,000	652,000
Cash collected to date	300,000	1,050,000	750,000

Required: (Note: All supporting calculations must be shown in order to get part marks)

1. Calculate the amount of gross profit that will be reported by NCC on its Statement of Comprehensive Income in each year? (6 marks)

2. What is the balance in the accounts receivable account on December 31, 2019? (2 marks)

3. What is the amount of the contract net asset or contract net liability to be reported on NCC’s Statement of Financial Position at December 31, 2019? Use appropriate T-accounts to support your answer. (4 marks)

1. If Napanee Construction Company had used the Zero Profit method instead of the Percentage-of-Completion method, how much gross profit would recorded in each year? (3 marks)

Answer 1

Napanee Construction Company (NCC) Percentage of completion Method Year 2018 Year 2019 Year 2020 Total Cost incurred to Date Add: Estimated cost to be incurred Estimated Total Cost $ 4,00,000 $ 16,00,000 $ 19,00,000 14,00,000 4,50,000 $ 18,00,000 $20,50,000 $ 19,00,000 22% 78% 100% % of completion of contract* (Total Cost incurred/ Estimated total cost) Contract Price Total Revenue to be recognized** (Contract price X % of completion) $ 21,00,000 $ 21,00,000 $ 21,00,000 4,66,667 16,39,024 21,00,000 *** Estimated Cost to Date Gross Profit recognized (Revenue - Estimated Less: Gross Profit recognized in previous year Gross Profit recognized to current year 18,00,000 20,50,000 (13,33,333) (4,10,976) (13,33,333) $ (13,33,333) $ 9,22,358 19,00,000 2,00,000 (4,10,976) $ 6,10,976 Note *Calculation of % of completion of contract Total cost incurred (A) 4,00,000 $ 16,00,000 $ 19,00,000 Total estimated cost (B) $ 18,00,000 $ 20,50,000 $ 19,00,000 22% 78% 100% % of completion of contract (A/B) X 100 (Round off) Total Revenue to be recognized Contract price (A) % of completion of contract (B) $ 21,00,000 $ 21,00,000 $ 21,00,000 22% 78% 100% Revenue to be recognized (AXB) $ 4,66,667 $ 16,39,024 $ 21,00,000

Requirement 2 *Accounts Receivables at year end 2018 Opening balance $ (+) Addtions 4,66,667 Cash collected 3,00,000 Closing balance $1,66,667 *Accounts Receivables at year end 2019 Opening balance (+) Addtions (-) Cash collected Closing balance $ 1,66,667 16,39,024 10,50,000 $7,55,691 Account Receivable year end 2019 balance would be $755,691.

Requirement 3 A *Billings in excess of cost and loss for 2018 opening Balance (+) Billing during the year $ 3,20,000 (-) Total cost incurred $ 4,00,000 $ (80,000) (+) Loss incurred $ 13,33,333 Billings in excess of cost and loss** $ 12,53,333 *Billings in excess of cost and loss for 2019 Opening Balance $ 12,53,333 (+) Billing during the year $ 10,50,000 (-) Total cost incurred 12,00,000 22,50,000 (+) Loss incurred 4,10,976 Costs and Profit in excess of billing $ 18,39,024 Partial Balance Sheet 31-Dec-19 Contract Net Liabilities Billings in excess of cost and loss Less: Accounts Receivables 18,39,024 7,55,691 10,83,333 $ Requirement 4 If Napanee has used Zero profit Method, Then Profit or loss will be recognized after the completion of contract. Therefore, profit or loss for 2018 and 2019 would be $ 0 and for 2020 it would be $ 200,000 2,100,000 - 1,900,000)