Oriole Construction Company has entered into a contract beginning January 1, 201

Question

Oriole Construction Company has entered into a contract beginning January 1, 2017, to build a parking complex. It has been estimated that the complex will cost $606,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $896,000. The following data pertain to the construction period. 2017 2018 2019 Costs to date Estimated costs to complete Progress billings to date Cash collected to date $266,640 $412,080 $617,000 339,360 270,000 240,000 193,920 545,000 495,000 896,000 896,000 (a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period. (Ifanswer is o, please enter 0. Do not leave any fields blank.) Gross profit recognized in 2017 Gross profit recognized in 2018 s Gross profit recognized in 2019 $ (b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period. (If answer is o, please enter 0. Do not leave any fields blank Gross profit recognized in 2017 Gross profit recognized in 2018 $ Gross profit recognized in 2019 »

Explanation / Answer

a) Under pencentage-of-completion method, Income is recognized as follows:

Income to be recognized = Percentage of work completion * Estimated Income

Where estimated income = Estimated revenue - estimated Cost and

% of work completion = cost to date/Estimated cost.

So, in the given problem,

Estimated Income = Rstimated revenue - estimated Cost = 896000-606000= $290000

1st Year - 2017

% of work completion for 1st year = cost to date for 2017/Estmated cost = 266640/606000 =44%

So gross profit to be recognized = 290000*44% = $127600

2nd Year - 2018

% of work completion for 2nd year = cost to date upto 2018/Estimated cost = 412080/606000 = 68%

So gross profit to be recognized till 2018 = 68% of 290000 = $197200

we have already booked $ 127600 in 2017, so gross profit to be recognized in 2018 = 197200-127600 = $ 69600

3rd Year - 2019

In 3rd year, the project is completed, so we an calculate the actual profit

Actual Profit = Revenue - Actual Cost = 896000-617000 = $ 279000

but we already booked gross profit of $ 127600 in 2017 & 69600 in 2018, so we will book remaining profit in 3rd year which is equal to 279000-127600-69600 i.e., $ 81800

b) Completed Contract Method

Under this method, revenue & Income is recognized in the year in which contract is completed

So, in the given problem, contract is completed in 2019, so it will book the profit of $ 279000(896000-617000) in the 3rd year

Gross Profit recognized in 2017 (in $) 127600 Gross Profit recognized in 2018 (in $) 69600 Gross profit recognized in 2019 (in $) 81800

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