On June 15, 2018, Sanderson Construction entered into a long-term construction c
ID: 2403728 • Letter: O
Question
On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2018 2019 2020 $ 70 $60 $30 Costs incurred during the year Estimated costs to complete as of December 31 130 30 Required 1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion 2. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time 3. Suppose the estimated costs to complete at the end of 2019 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion methodExplanation / Answer
1.
2018
2019
2020
Estimated Total gross profit(loss)
110
Actual total gross profit (loss)
150
150
Explanation:
($ in millions)
2018
2019
2020
Contract price
$
310
$
310
$
310
Actual costs to date
70
130
160
Estimated costs to complete
130
30
- 0 -
Total estimated costs
200
160
160
Estimated gross profit (loss) (actual in 2018)
$
110
$
150
$
150
2.
Percentage of Completion:
Choose numerator
/
Choose denominator
=
%complete to date
2018
70
/
200
=
38.50%
2019
130
/
160
=
83.00%
2020
150%
2018
To date
Recognized in prior years
Recognized in 2018
Construction Revenue
108.50
108.50
Construction Expense
(70)
(70)
Gross profit(loss)
38.50
38.50
2019
Construction Revenue
251.00
108.50
142.50
Construction Expense
130
70
60
Gross profit(loss)
121
38.50
82.50
2020
Construction Revenue
310.00
251.00
59.00
Construction Expense
160.00
130.00
30
Gross profit(loss)
150.00
121.00
29.00
Gross profit (loss) recognition:
2018:
$70
= 35% × $110 = $38.50
$200
2019:
$130
= 81.00% × $150 = $121.50 – $38.50 = $83.00
$160
2020: $310 – 160 = $150 – ($38.50 + 83.00) = $28.50
Revenue recognition:
2018:
$70
= 35% × $310 = $108.50
$200
2019:
$130
= 81.00% × $310 = $251.00 – $108.50 = $142.50
$160
2020: $310 – ($108.50 + $142.50) = $59.00
3.
Percentage of Completion:
Choose numerator
/
Choose denominator
=
%complete to date
Actual costs to date
Estimated total costs
2019
130
260
50.00%
Revenue recognition:
2019:
$130
= (50% × $310) – $142.50 = $12.50
$260
Gross profit (loss) recognition:
2019:
$130
= 50% × $50* = $25.00 – 38.50 = $(13.50) loss
$260
*$310 – ($70+ 60 + 130) = $50
2018
2019
2020
Estimated Total gross profit(loss)
110
Actual total gross profit (loss)
150
150
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