Question1 On July 1, 2017, Teal Construction Company Inc. contracted to build an
ID: 2518325 • Letter: Q
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Question1 On July 1, 2017, Teal Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,920,000. On July 1, Teal estimated that it would take between 2 and 3 years to complete the building. On December 31, 2019, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2017, 2018, and 2019 At At At 12/31/17 12/31/18 12/31/19 Contract costs incurred to date Estimated costs to complete the contract Billings to Gumbel $312,900 $1,096,200 $2,139,000 933,800 1,177,100 290,000 1,110,000 1,880,000 (a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore income taxes.) (If answer is 0, please enter 0. Do not leave any field blank.) 2017 Costs to date (12/31/17) 312900 Estimated Costs to Complete 1177100 Estimated Total Costs 1467100 Percent Complete Revenue Recognized Costs Incurred 312900 Profit/Loss) Recognized in 2017$Explanation / Answer
Contract revenue should comprise:
(a) the initial amount of revenue agreed in the contract;and
(b) variations in contract work, claims and incentive payments:
(i) to the extent that it is probable that they will result in revenue; and
(ii) they are capable of being reliably measured.
Contract costs should comprise:
(a) costs that relate directlyt othes pecific contract;
(b) costs that are attributable to contract activity in general and can be allocated to the contract; and
(c) such other costsasarespecifically chargeable to the customer under the terms of the contract.
Recognition of contract revenue and costs :
When the outcome of a construction contract can be estimated reliably, contract revenue and contract costs associated with the construction contract should be recognised as revenue and expenses respectively by reference to the stage of completion of the contract activity at the reporting date.
Percentage Completion Method :
The recognition of revenue and expenses by reference to the stage of completion of a contract is often referred to as the percentage of completion method. Under this method, contract revenue is matched with the contract costs incurred in reaching the stage of completion, resulting in the reporting of revenue, expenses and profit which can be attributed to the proportion of work completed. This method provides useful information on the extent of contract activity and performance during a period.
Under the percentage of completion method, contract revenue is recognised as revenue in the statement of profit and loss in the accounting periods in which the work is performed. Contract costs are usually recognised as an expense in the statement of profit and loss in the accounting periods in which the work to which they relate is performed
Calculation of Stage of Completion :
The amounts of revenue, expenses and profit recognised in the statement of profit and loss in the three years are as follows:
Completion Contract Method :
Completed contract method is an approach used for construction contract accounting in which the revenue is recognized only when the contract is 100% complete. In contrast to the percentage of completion method, which records estimated revenue in each period based on the percentage of completion of the contract, the completed contract method defers contract revenue. However, even the completed contract method does not defer recognition of related costs and expenses.
Gross profit on a completed contract = total contract price – contract costs
Total Gross profit of the contract = 1920000 - 2139000 = (219000)
Loss to be accounted in year of completion = (219000)
Particulars 12/31/2017 12/31/2018 12/31/2019 Initial Amount of revenue agreed in contract 1920000 1920000 1920000 Variation 0 0 0 Total Contract Revenue 1920000 1920000 1920000 Costs Incurred till date 312900 1096200 2139000 Estimated costs to complete the contract 1177100 933800 0 Total Estimated Contracts cost 1490000 2030000 2139000 Estimated Profit 430000 -110000 -219000 Stage of Completion 21% 54% 100%The amounts of revenue, expenses and profit recognised in the statement of profit and loss in the three years are as follows:
Particulars Upto Reporting Date Recognised in prior years Recognised in Current year 12/31/2017 Revenue 403,200 - 403,200 Expenses 312,900 - 312,900 Profit 90,300 90,300 12/31/2018 Revenue 1,036,800 403,200 633,600 Expenses 1,096,200 312,900 783,300 Profit (59,400) (149,700) 12/31/2019 Revenue 1920000 1,036,800 883,200 Expenses 2139000 1,096,200 1,042,800 Profit (219,000) (159,600)Completion Contract Method :
Completed contract method is an approach used for construction contract accounting in which the revenue is recognized only when the contract is 100% complete. In contrast to the percentage of completion method, which records estimated revenue in each period based on the percentage of completion of the contract, the completed contract method defers contract revenue. However, even the completed contract method does not defer recognition of related costs and expenses.
Gross profit on a completed contract = total contract price – contract costs
Total Gross profit of the contract = 1920000 - 2139000 = (219000)
Loss to be accounted in year of completion = (219000)
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