Limerock Custom Builders was established in 1971 by Jon Rock and initially built
ID: 2476586 • Letter: L
Question
Limerock Custom Builders was established in 1971 by Jon Rock and initially built high-quality customized homes under contract with specific buyers. In the 1990s. Rock's son joined the company and expanded Limerock's activities into industri.il and commercial retail markets. Upon the retirement of Limerock's long-time financial manager. Risk s son recently hired Flint, a former college friend, as the new controller for Limerock. Flint, has been associated with a public accounting firm for the last 6 years. Upon reviewing Limerock's accounting practices. Flint observed that Limerock followed the completed-contract method of rrvenue recognition, a carryover front the years when individual home building was the majority of Linterock's operations. Several years ago. the predominant portion of Limrock's activities shifted to the commerical retail and industrial building areas. From land acquisions to the completion of construction, most building contracts cover several years. Under the circumstances. Flint believes that Limeorck should follow the percentage-of-completion method of accounting. From a typical building contract, Flint developed the following data. Explain the difference between completed-contract revenue recognition and percentage-of-completion revenue recognition. Using tin- data provided for the Sunshine Mall and assuming the percentage-of-completion method of revenue recognition is used, calculate Limerock's revenue and gross profit for 2014. 201?, and 2016. under each of the following circumstances. Assume that all costs an- incurred, all billings to customers are made, and all collections from customers are received within 30 days of billing, as planned. Further assume that, as a result of unforeseen local ordinances and the fact that the building site was in a wetlands area, Limerock experienced cost overruns of 5800.000 in 2014 to bring the site into compliance with the ordinances and to overcome wetlands barriers to construction further assume that, in addition to the cost overruns of $800,000 for this contract incurred under part (b)(2), inflationary factors over and above those anticipated in the development of the original contract cost have mused an additional cost overrun of $900, 000 in 201? It is not anticipated that any cost overruns will occur in 2016.Explanation / Answer
The logic behind the percentage-of-completion method is that both the buyer and seller have obtained enforceable rights. The buyer has the right to require specific performance on the contract; the seller has the right to require progress payments. Thus the facts seem to indicate that a continuous “sale” is in progress.
According to Statement of Position 81-1, the percentage method should be used if estimates of progress toward completion, revenues, and costs are reasonably dependable, and all the following conditions exist:
If these conditions have not been met, then the completed-contract method should be used. It should be emphasized that the total profit on the construction project is the same under both methods.
The difference between methods is simply a question of timing—the percentage method recognizes profit little by little over time, while the completed-contract method defers the entire profit until completion.
Contract Price = $12,000,000
Percentage of work completed = Expenditure incurred from Inception to date / Total Estimated costs.
Revenue Recognized = Percentage of work completed * Total contract value
(b)(1)
2014
2015
2016
Estimated Costs
3,000,000
4,200,000
2,800,000
Cumulative estimated costs
3,000,000
7,200,000
10,000,000
Total estimated costs
10,000,000
10,000,000
10,000,000
Percentage of work completed
0.3 or 30%
0.72 or 72%
1 or 100%
Contract Value
12,000,000
12,000,000
12,000,000
Cumulative Estimated Revenue
3,600,000
8,640,000
12,000,000
Estimated revenue for that year
3,600,000
5,040,000
3,360,000
Estimated Costs
3,000,000
4,200,000
2,800,000
Gross profit
600,000
840,000
560,000
(b)(2)
2014
2015
2016
Estimated Costs
3,800,000
4,200,000
2,800,000
Cumulative estimated costs
3,800,000
8,000,000
10,800,000
Total estimated costs
10,800,000
10,800,000
10,800,000
Percentage of work completed
0.35
0.74
1.00
Contract Value
12,000,000
12,000,000
12,000,000
Cumulative Estimated Revenue
4,200,000
8,880,000
12,000,000
Estimated revenue for that year
4,200,000
4,680,000
3,120,000
Estimated Costs
3,800,000
4,200,000
2,800,000
Gross profit
400,000
480,000
320,000
(b)(3)
2014
2015
2016
Estimated Costs
3,800,000
5,100,000
2,800,000
Cumulative estimated costs
3,800,000
8,900,000
11,700,000
Total estimated costs
11,700,000
11,700,000
11,700,000
Percentage of work completed
0.32
0.76
1.00
Contract Value
12,000,000
12,000,000
12,000,000
Cumulative Estimated Revenue
3,840,000
9,120,000
12,000,000
Estimated revenue for that year
3,840,000
5,280,000
2,880,000
Estimated Costs
3,800,000
5,100,000
2,800,000
Gross profit
40,000
180,000
80,000
2014
2015
2016
Estimated Costs
3,000,000
4,200,000
2,800,000
Cumulative estimated costs
3,000,000
7,200,000
10,000,000
Total estimated costs
10,000,000
10,000,000
10,000,000
Percentage of work completed
0.3 or 30%
0.72 or 72%
1 or 100%
Contract Value
12,000,000
12,000,000
12,000,000
Cumulative Estimated Revenue
3,600,000
8,640,000
12,000,000
Estimated revenue for that year
3,600,000
5,040,000
3,360,000
Estimated Costs
3,000,000
4,200,000
2,800,000
Gross profit
600,000
840,000
560,000
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.