Sue\'s Construction is in its fourth year of business. Sue performs longterm con

Question

Sue's Construction is in its fourth year of business. Sue performs longterm construction projects and accounts for them using the completedcontract method. Sue built an apartment building at a price of $1,100,000. The costs and billings for this contract for the first three years are as follows. 2012 2013 2014 Costs incurred to date $240,000 $600,000 $ 790,000 Estimated costs yet to be incurred 560,000 200,000 –0– Customer billings to date 150,000 410,000 1,100,000 Collection of billings to date 120,000 340,000 950,000 Sue has contacted you, a certified public accountant, about the following concern. She would like to attract some investors, but she believes that in order to recognize revenue she must first “deliver” the product. Therefore, on her balance sheet, she did not recognize any gross profits from the above contract until 2014, when she recognized the entire $310,000. That looked good for 2014, but the preceding years looked grim by comparison. She wants to know about an alternative to this completedcontract revenue recognition. Instructions 1. Draft a letter to Sue, telling her about the percentageofcompletion method of recognizing revenue. Compare it to the completedcontract method. Explain the idea behind the percentageofcompletion method. 2. In addition, illustrate how much revenue she could have recognized in 2012, 2013, and 2014 if she had used the percentageofcompletion method of recognizing revenue. Show a Three-Year Schedule of Gross Profit Recognition

In do not need the #1 Draft letter to Sue just the other questions.

Explanation / Answer

Answer:

Particulars 2012 2013 2014 Contract revenue 1100000 1100000 1100000 Cost incurred to date 240000 600000 790000 estimated cost 560000 200000 0 Total cost 800000 800000 790000 % of completion 0.3 0.75 1 Revenue 330000 825000 1100000 Cost incurred to date 240000 600000 790000 Gross revenue 90000 225000 310000 Less: Recognised in prior years 0 90000 225000 Gross revenue 90000 135000 85000

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