Problem4 Perasso Construction entered into a fixed-price contract with Santos As

Question

Problem4 Perasso Construction entered into a fixed-price contract with Santos Associates on Apri 1, 2013, to construct an office building The total contract price for construction of the building is $5,000,000. The building was completed in 2015. Cost information for 2013 and 2014 were as follows 2013 2014 Costs incurred during the year Estimated costs to complete Required: 1. Compute the gross profit or loss to be recognized during 2013 and 2014 applying the 3,600,000 2,600,000 completed contract method Compute the gross profit or loss to be recognized during 2013 and 2014 applying the percentage-of-completion method 2.

Explanation / Answer

1) Under completed contract method, the whole amount of contract revenue is recognized in the year of completion of contract. In the given case, the contract was completed in 2015. Hence the whole contract revenue will be recognized in year 2015 and cost incurred in 2013 and 2014 will result in loss.

Loss to be recognized in 2013 = Revenue to be recognized - Cost incurred

= $0 - $400,000 = ($400,000)

Loss to be recognized in 2014 = Revenue to be recognized - Cost incurred

= $0 - $2,200,000 = ($2,200,000)

2) Under percentage of completion method, percent of contract completed is calculated on the basis of cost incurred and estimated cost to incurred. The percentage of contract completion is used for recognizing contract revenue for each year.

Percentage of Completion of 2013 = Cost incurred in 2013/Total estimated Cost to be incurred

Total estimated cost to be incurred in 2013 = $400,000+$3,600,000 = $4,000,000

Percentage of Completion of 2013 = $400,000/$4,000,000 = 10%

Percentage of Completion of 2014 = Cost incurred upto 2014/Total estimated Cost to be incurred

= ($400,000+$2,200,000)/($400,000+$2,200,000+$2,600,000)

= $2,600,000/$5,200,000 = 50%

Revenue to be recognized in 2013 = Contract Price*10%

= $5,000,000*10% = $500,000

Gross Profit for 2013 = Revenue Recognized - Cost incurred

= $500,000 - $400,000 = $100,000

Revenue to be recognized in 2014 = (Contract Price*50%) - Revenue recognized in 2013

= ($5,000,000*50%) - $500,000 = $2,000,000

Loss for 2014 = Revenue Recognized - Cost incurred

= $2,000,000 - $2,200,000 = ($200,000)

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