On January 2, 20x0, Kowalski Construction Company signed a contract to provide p

Question

On January 2, 20x0, Kowalski Construction Company signed a contract to provide paved roads to a new housing development. The project will last 2 years, and the total payment will be $4 million, to be paid at completion of the project. Kowalski's budgeted cost for the project is S3 million. Work will progress evenly over the 2 years. On December 31, 20xo, Kowalski's accountant asks you what revenue should be recorded for 20X0. Costs of $1.5 million were incurred during 20X0 1. Suppose Kowalski uses the percentage of completion method. What revenue should be recorded for 20X0? What profit is recognized in 20X0? 2. Suppose Kowalski uses the completed contract method. What revenue should be recorded for 20X0? What profit is recognized in 20X0? 3. Assume that the contract was with a large corporation that is very stable. Under current U.S GAAP which method should Kowalski use? 4. Assume that the contract is with a small developer and the economy has taken a downturn during 20Xx0, making payment of the final contract price highly uncertain. However, Kowalski Company still believes it will receive payment and continues working on the project. Under current U.S. GAAP, which method should Kowalski use? 5. How would your answers to requirement 4 change if Kowalski were reporting under IFRS rather than U.S. GAAP

Explanation / Answer

1. Cost incurred in 20X0 = $1.5 millon

Cost percentage = $1.5/3 million = 50%

50% of total revenue will be recorded in year 20X0 i.e. $2 million.

Profit = $2 - $1.5 million = $ 0.5 million

2. No revenue and profit recognization shall be done at the end of the first year under completed contract method.

3. I fthe contract was with a large corporation that is very stable, the percentage completion method shouldbe used as the collections are assured and profitability and work completion estimations could be made.

4. In this case, Completed contract method should be used as the final contract price is highly uncertain.

5. Under IFRS Percentage completion method is only allowed to use.

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