On December 31, 2017, Tri-State Construction Inc. signs a contract with the state of West Virginia Department of Transportation to manufacture a bridge over the New River. State anticipates the construction will take three years. The company’s accountants provide the following contract details relating to the project:
Contract price |
$780 million |
Estimated construction costs |
$600 million |
Estimated total profit |
$180 million |
During the three-year construction period, Tri-State incurred costs as follows:
2018 |
$ 60 million |
2019 |
$360 million |
2020 |
$180 million |
Compute the revenue recognized, construction costs expensed, and income earned for each year using the cost-to-cost method.
Cost to cost method
Step 1
Calcuation of percentage completion
Percentage completion = Cost incured to date / Estimated total cost
For year 2018;
Percenatge completion = $ 60 million / $ 600 million
= 10 %
For year 2019;
Percentage completion = $ 360 million / $ 600 million
= 60%
For year 2020;
Percentage completion = $ 180 million / $ 600 million
= 30%
YEAR | PERCENTAGE COMPLETION ( %) |
2018 | 10 |
2019 | 60 |
2020 | 30 |
Step 2
Calculation of revenue recognized, construction cost expensed & income earned for each year
For Year 2018;
Revenue recognized = Contract price * percentage completed
= $ 780 million * 10%
= $ 78 million
Construction cost expensed = $ 60 million ( given in question)
Income earned = Revenue recognized for the year - construction cost expensed for the year
= $ 78 million - $ 60 million
= $ 18 million
For year 2019;
Revenue recognized = $ 780 million * 60%
= $ 468 million
Construction cost expensed = $ 360 million
Income earned = $ 468 million - $ 360 million
= $ 108 million
For year 2020;
Revenue recognized = $ 780 million * 30%
= $ 234 million
Construction cost expensed = $ 180 million
Income earned = $ 234 million - $ 180 million
= $ 54 million
On December 31, 2017, Tri-State Construction Inc. signs a contract with the state of West Virginia...
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