Completed Contract Method versus Percentage-of-Completion Method The Miller Comp

Question

Completed Contract Method versus Percentage-of-Completion Method The Miller Company won a contract to build a shopping center at a price of $240 million. The following schedule details the estimated and actual costs of construction and the actual cash collections under the contract: Estimated (Actual) Costs Cash Collections of Construction From Customer Year 1 $40,000,000 $48,000,000 Year 2 60,000,000 60,000,000 Year 3 70,000,000 60,000,000 Year 4 30,000,000 72,000,000 $200,000,000 $240,000,000 Prepare an income statement for the Miller Company for each year assuming that the company recognizes revenue under the completed contract method.   Year 1 Year 2 Year 3 Year 4 Total Revenue Construction Cost Net Income Prepare an income statement for the Miller Company for each year assuming that the company recognizes revenue under the percentage-of-completion method. Year 1 Year 2 Year 3 Year 4 Total Revenue Construction Cost Net Income Completed Contract Method versus Percentage-of-Completion Method The Miller Company won a contract to build a shopping center at a price of $240 million. The following schedule details the estimated and actual costs of construction and the actual cash collections under the contract: Estimated (Actual) Costs Cash Collections of Construction From Customer Year 1 $40,000,000 $48,000,000 Year 2 60,000,000 60,000,000 Year 3 70,000,000 60,000,000 Year 4 30,000,000 72,000,000 $200,000,000 $240,000,000 Prepare an income statement for the Miller Company for each year assuming that the company recognizes revenue under the completed contract method.   Year 1 Year 2 Year 3 Year 4 Total Revenue Construction Cost Net Income Prepare an income statement for the Miller Company for each year assuming that the company recognizes revenue under the percentage-of-completion method. Year 1 Year 2 Year 3 Year 4 Total Revenue Construction Cost Net Income

Explanation / Answer

Year 1 Year 2 Year 3 Year 4 Expenditures Incurred from Inception to Date[1] $40,000,000 $100,000,000 $170,000,000 $200,000,000 Total Estimated Costs for the Contract[2] $200,000,000 $200,000,000 $200,000,000 $200,000,000 Percentage of Work Completed[1]/[2] 20% 50% 85% 100% Revenue[Degree of Completion*estimated revenue] $48,000,000 $120,000,000 $204,000,000 $240,000,000 [240 million*20% [240 million*50%] [240 million*85% [240 million*100% Construction Cost $40,000,000 $100,000,000 $170,000,000 $200,000,000 Net Income $8,000,000 $20,000,000 $34,000,000 $40,000,000 Less: Profit recognised in earlier yr 0 $8,000,000 $20,000,000 $34,000,000 Profit for the current yr $8,000,000 $12,000,000 $14,000,000 $6,000,000 The Completed-Contract This method defers all the profit on the construction project until the completion date. During the construction period, all costs incurred are debited to an inventory account called “Construction in Process“. This is similar to the Work in Process account used in cost accounting. Billings are debited to Accounts Receivable and credited to an account called “Billings on Construction“. This is not a revenue account since this method does not recognize any revenue or profit until completion. Rather, it is a contra asset to the Construction in Process Account. Finally, at completion, the construction and billings accounts are closed, and the difference between them is recognized as gross profit. Year 1 Year 2 Year 3 Year 4 CONTRCT REVENUE $240,000,000 CONTRACT COST $40,000,000 $60,000,000 $70,000,000 $30,000,000 CHARGED TO WIP $40,000,000 $60,000,000 $70,000,000 REVENUE RECOGNISED IN P&L $210,000,000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.