Daisy Construction Ltd. has entered into a contract beginning January 1, 2014, t
ID: 2490080 • Letter: D
Question
Daisy Construction Ltd. has entered into a contract beginning January 1, 2014, to build a parking complex. It has estimated that the complex will cost $8 million and will take three years to construct. The complex will be billed to the purchasing company at $11.3 million. The details are as follows: 2014 2015 2016 Costs to date $ 3,060,000 $ 6,435,000 $ 8,300,000 Estimated costs to complete 4,596,300 2,032,557 –0– Progress billings to date 4,001,300 6,300,000 11,300,000 Cash collected to date 3,501,300 5,000,000 11,300,000 Under the earnings approach: Collapse question part (a) Incorrect answer. Your answer is incorrect. Try again. Using the percentage-of-completion method, calculate the estimated gross profit that would be recognized during each year of the construction period. (Round percent complete to 2 decimal places, e.g. 52.75% and final answers to 0 decimal places, e.g. 5,275.)
Explanation / Answer
Percentage-of-completion method
Under the earnings approach,
revenue recognition depends on thecompany’s earnings process. Revenue is recognized in a mannerconsistent with this earnings process and when the company hassubstantially completed its performance obligations. This approachfocuses on measuring revenue and costs and appropriately reflectingthese in the income statement.The concept of risks and rewards ofownership is central to the earnings approach since it establishesownership. Revenue from sale of goods is recognized whenownership transfers or passes to the buyer. Revenue from sale ofservices is recognized when services are provided.Under the contract-based approach, revenue is recognized when theentity satisfies a performance obligation, which occurs when thecustomer obtains control over the good or service. Performanceobligations represent what the company has agreed to sell or dounder the contract. The concept of control, central to this approach, isbased on a legalistic view. Revenue is recorded when legal titlepasses. This requires less judgment than the risks and rewards testunder the earnings approach. Under the earnings approach, anassessment of risks and rewards may show that both the buyer andthe seller have some, but not all of the risks and rewards associatedwith the good or service.
$ Particulars 2014 2015 2016 Costs incurred to date 3,060,000 6,435,000 8,300,000 Estimated costs to complete 4,596,300 2,032,557 - Total Cost 7,656,300 8,467,557 8,300,000 percentage-of-completion 39.97% 76.00% 100.00% (Costs incurred to date/Total cost Contract price 11,300,000 11,300,000 11,300,000 Revenue to be recognised 4,516,281 8,587,542 11,300,000 (Contract price*percentage-of-completion) Costs incurred to date 3,060,000 6,435,000 8,300,000 Profit or loss to be recognised(Cummulative) 1,456,281 2,152,542 3,000,000 Profit or loss to be recognised in each year 1,456,281 696,261 847,458Related Questions
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