?(Long-Term Contract with an Overall Loss) On July 1, 2012, Torvill Construction
ID: 2463353 • Letter: #
Question
?(Long-Term Contract with an Overall Loss) On July 1, 2012, Torvill Construction Company Inc. contracted tobuild an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimatedthat it would take between 2 and 3 years to complete the building. On December 31, 2014, the building wasdeemed substantially completed. Following are accumulated contract costs incurred, estimated costs tocomplete the contract, and accumulated billings to Gumbel for 2012, 2013, and 2014
Explanation / Answer
Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2012
Costs to date (12/31/12) $ 300,000
Estimated costs to complete 1,200,000
Estimated total costs $1,500,000
Percent complete ($300,000 ÷ $1,500,000) 20%
Revenue recognized ($1,900,000 X 20%) $ 380,000
Costs incurred (300,000)
Profit recognized in 2012 $ 80,000
2013
Costs to date (12/31/13) $1,200,000
Estimated costs to complete 800,000
Estimated total costs 2,000,000
Contract price (1,900,000)
Total loss $ 100,000
Total loss $ 100,000
Plus gross profit recognized in 2012 80,000
Loss recognized in 2013 $ 180,000
2014 revenue
($1,900,000 –$380,000–$760,000) $ 760,000
Less: 2014 estimated costs 800,000
2014 loss $ (40,000)
2014
Costs to date (12/31/14) $2,100,000
Estimated costs to complete 2,100,000
Contract price 1,900,000
Total loss $ (200,000)
Total loss $ (200,000)
Less: Loss recognized in 2013 $180,000
Gross profit recognized in 2012 (80,000) (100,000)
Loss recognized in 2014 $ (100,000)
(b) Computation of Recognizable Profit/Loss
Completed-Contract Method
2012—NONE
2013
Costs to date (12/31/13) $1,200,000
Estimated costs to complete 800,000
Estimated total costs 2,000,000
Contract price 1,900,000
Loss recognized in 2013 $ (100,000)
2014
Total costs incurred $2,100,000
Total revenue recognized 1,900,000
Total loss on contract (200,000)
Deduct loss recognized in 2013 (100,000)
Loss recognized in 2014 $ (100,000)
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