Question

Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale. During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $15 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: 2018 2019 2020 Costs incurred during the year $ 3,000,000 $ 7,125,000 $ 3,375,000 Estimated costs to complete as of year-end 9,000,000 3,375,000 — Billings during the year 1,500,000 7,500,000 6,000,000 Cash collections during the year 1,350,000 6,050,000 7,600,000 Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $720,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $720,000 each by the buyers. The completed homes cost $540,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $3,240,000.

		2018	2019	2020
costs incurred during the year		3,000,000	7,125,000	3,375,000
estimated costs to complete as of year-end		9,000,000	3,375,000	-0-
Billings during the year		1,500,000	7,500,000	6,000,000
cash collections during the year		1,350,000	6,050,000	7,600,000

Required: 1. Which method is most equivalent to recognizing revenue at the point of delivery?

2. Answer the following questions assuming that Citation uses the completed contract method for its office building contracts: 2-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 2-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 2-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.)

3. Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts. 3-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 3-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 3-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.)

4. Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $6,750,000. Citation uses the percentage-of-completion method for its office building contracts. 4-a. How much revenue related to this contract will Citation report in the 2019 income statement? 4-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019? 4-c. What will Citation report in its 2019 balance sheet related to this contract? (Ignore cash.)

5. Which method of accounting should Citation Builders, Inc adopt for its single-family houses?

6. What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?

Answer 1

Answer :

question 6 :

What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?

Income statement = 3 * 720,000

= $ 2,160,000

Cost of goods sold = 3 * $ 540,000

= $ 1,620,000

Gross profit = $ 2,160,000 + $ 1,620,000

= $ 3,780,000

Balance sheet :

Particulars	Amount
	Assets	Liabilities
Inventory(Work in progress)	$ 3,240,000
Customer deposits amount		$ 720,000 * 10% = $ 720,000 * 5 = $ 3,600,000

Question 4 :

Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $6,750,000. Citation uses the percentage-of-completion method for its office building contracts.

Particulars	Amount
	2013	2014
Contract price	$ 15,000,000	$ 15,000,000
Actual costs to date	$ 3,000,000	=3,000,000 + $ 7,125,000 =$ 10,125,000
Estimated cost to complete	$ 9,000,000	$ 6,750,000
Total estimated cost	= $ 3,000,000 + $ 9,000,000 = $ 12,000,000	=$ 10,125,000 + $ 6,750,000 = $ 16,875,000
Estimated gross profit	= $ 15,000,000 - $ 12,000,000 = $ 3,000,000	= $ 15,000,000 - $ 16,875,000 = - $ 1,875,000

a)How much revenue related to this contract will Citation report in the 2019 income statement?

In 2013 ;

amount = $ 15,000,000 * 25%

= $ 15,000,000 * 0.25

= $ 3,750,000

In 2014 :

= $ 15,000,000 * 75 %

= $ 15,000,000 * 0.75

= $ 11,250,000

Total amount = $ 11,250 000 - $ 3,750,000

= $ 7,500,000

b)What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019?

In 2014 :

Overall loss of - $ 1,875,000 :

Recognised gross profit of 1,000,000 = $ 2,875,000

c)What will Citation report in its 2019 balance sheet related to this contract?

Balance sheet at Dec 31 :

Particulars	Amount
Current assets	$ 1,500,000
Accounts received of costs and profit in exceeding buildings	= $ 3,750,000 - $ 1,500,000 = $ 2,250,000

5) Which method of accounting should Citation Builders, Inc adopt for its single-family houses?

Alert ought to perceive income at the purpose of delivery,when the homes are finished and this is exchanged to the buyer.This is proportional to the finished contract strategy for long haul contracts. The level of finish technique isn't fitting in this case.there is no agreement set up and until the fruition of the home,the exchange and title and the receipt of the full deals price,the profit process isn't virtually finished and there is as yet critical vulnerability as to money collection.Also the business costs isn't fixed.

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