On March 1, 2014, Pechstein Construction Company contracted to construct a facto
ID: 2424437 • Letter: O
Question
On March 1, 2014, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of $8,091,000. The building was completed by October 31, 2016. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2014, 2015, and 2016 are given below. 2014 2015 2016 Contract costs incurred during the year $2,773,930 $2,882,630 $1,987,440 Estimated costs to complete the contract at 12/31 3,677,070 1,987,440 –0– Billings to Fabrik during the year 3,486,000 3,484,000 1,121,000 (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, 2014, 2015, and 2016. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) 2014 $ $ % $ $ 2015 $ $ % $ $ 2016 $ $ (b) Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2014, 2015, and 2016. 2014 $ 2015 $ 2016 $ Click if you would like to Show Work for thi
Explanation / Answer
Ans:
(a) Computation of Recognizable Profit/Loss
Percentage-of-Completion Method
2010
Costs to date (12/31/10)...................................................................... $2,880,000
Estimated costs to complete............................................................... 3,520,000
Estimated total costs................................................................. $6,400,000
Percent complete ($2,880,000 ÷ $6,400,000).................................... 45%
Revenue recognized ($8,400,000 X 45%)......................................... $3,780,000
Costs incurred.................................................................................... 2,880,000
Profit recognized in 2010................................................................... $ 900,000
2011
Costs to date (12/31/11)
($2,880,000 + $2,230,000).............................................................. $5,110,000
Estimated costs to complete............................................................... 2,190,000
Estimated total costs................................................................. $7,300,000
Percent complete ($5,110,000 ÷ $7,300,000).................................... 70%
Revenue recognized in 2011.. ($8,400,000 X 70%) – $3,780,000 $2,100,000 Costs incurred in 2011........................................................................................... 2,230,000
Loss recognized in 2011..................................................................... $ (130,000)
2012
Total revenue recognized.................................................................. $8,400,000
Total costs incurred........................................................................... 7,300,000
Total profit on contract..................................................................... 1,100,000
Deduct profit previously recognized
($900,000 – $130,000)..................................................................... 770,000
Profit recognized in 2012................................................................... $ 330,000*
*Alternative
Revenue recognized in 2012
($8,400,000 X 30%)........................................................................ $2,520,000
Costs incurred in 2012....................................................................... 2,190,000
Profit recognized in 2012................................................................... $ 330,000
(b) Computation of Recognizable Profit/Loss
Completed-Contract Method
2010—NONE
2011—NONE
2012
Total revenue recognized.................................................................. $8,400,000
Total costs incurred........................................................................... 7,300,000
Profit recognized in 2012................................................................... $1,100,000
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