Citation Builders, Inc., builds office buildings and single-family homes. The of

Question

Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale.

Also during 2016, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2016 and paid for in full for $600,000 each by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred during 2016 for the nine uncompleted homes totaled $2,700,000.
Required:

1. Briefly explain the difference between recognizing revenue over time and upon project completion when accounting for long-term construction contracts.

2. Answer the following questions assuming that Citation concludes it does not qualify for revenue recognition over time for its office building contracts:

a. How much revenue related to this contract will Citation report in its 2016 and 2017 income statements? b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017?

c. What will Citation report in its December 31, 2016, balance sheet related to this contract? (Ignore cash.)

3. Answer requirements 2a through 2c assuming that Citation recognizes revenue over time according to percentage of completion for its office building contracts.

4. Assume the same information for 2016 and 2017, but that as of year-end 2017 the estimated cost to complete the office building is $9,000,000. Citation recognizes revenue over time according to percentage of completion for its office building contracts.

a. How much revenue related to this contract will Citation report in the 2017 income statement?

b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2017?

c. What will Citation report in its 2017 balance sheet related to this contract? (Ignore cash.)

5. When should Citation recognize revenue for the sale of its single-family homes?

6. What will Citation report in its 2016 income statement and 2016 balance sheet related to the single-family home business (ignore cash in the balance sheet)?   

Explanation / Answer

1. As per Accounting Standard 9 " Accounting for Recognising of Revenue" issued by the Institute of Chatrered Accounatnt of India, revenue in the long term construction contracts are recognised as per the completion cost method. It means that the contractors will reconise revenue as a percentage of cost incurred tilll the reporting date on the total estimated cost. However, as in general business, revenues are reconised as per the matching concept principle applying the concept of consevatism. It simply means that revenue for the particular year is recognised as per the amount received or receivable for the work done in respect of that particular year. whereas in long term construction contract revenues are reconised as per cost of completion method as explained above irrecpective of amount received or receivable subject to cot escaltion.

2. As Citation is not qualified for revenue recognition over time for its office building contracts:

a. Citation will recognise revenue in respect of Office building contracts as per cost of completion method:

For Year 2016,

so percentage of Completion = Cost incurred till date / estimated cost to completed the contract

= 4000000/12000000

= 33.33%

So, Revenue for 2016 = 20000000*33.33%

= $ 6,666,000

For Year 2017,

percentage of Completion = Cost incurred till date / estimated cost to completed the contract

= (4000000+9500000) / (12000000+4500000)

= 81.82%

So, Revenue for 2017 = 20,000,000*81.82%-  $ 6,666,000

= $ 8,181,818.18 -  $ 6,666,000

= $9,698,000

b. Amount of gross profit or loss to be rcognised for the contract of Altamount contract:

For the year 2016,

i. Revenue = $ 6,666,000

ii. Cost incurred till date = $ 12,000,000

iii. Gross profit (i-ii) = $ 5,334,000

For the year 2017,

i. Revenue = $ 9,698,000

ii. Cost incurred During the year = $ 9,500,000

iii. Additional cost estimated to incur = $ 2,000,000

iv. Gross profit/ (loss) (i-ii-iii) = ($ 1,802,000)

c. As per the Schedule II of the Companies Act, 2013 the Citation will report in its balance sheet that the company has undertaken a long term construction contract from Altamount Corporation and 33.33 % work has been completed as per the cost of completion method. Accordingly, revenue of $ 6,666,000 has been recoginsed wheresa billed has been raised of $ 2,000,000 and cash has been collected of $ 1,800,000.

4. If at the year end, the cost estimated to incurr in the next year exceed beyond the initially estimated cost then such cost shall be recorded as the Additional cost applying th econcept of prudence. Accordingly,

a. Revenue of 2017

percentage of Completion = Cost incurred till date / estimated cost to completed the contract

= (4000000+9500000) / (12000000+9000000)

= 64.29%

So, Revenue for 2017 = 20,000,000*64.29%-  $ 6,666,000

= $ 12,857,143.86 -  $ 6,666,000

= $ 6,191,142.86

b. Amount of gross profit or loss to be rcognised for the contract of Altamount contract:

i. Revenue = $ 6,191,142.86

ii. Cost incurred During the year = $ 9,500,000

iii. Additional cost estimated to incur = $ 6,500,000

iv. Gross profit/ (loss) (i-ii-iii) = ($ 9,808,857.14)

c. The Citation will report in its balance sheet for the year end on December, 2017 ,that the company has undertaken a long term construction contract from Altamount Corporation and by 2017 it has completed 64.29 % as per the cost of completion method. Accordingly, revenue of $ 6,191,142.86 has been recoginsed wheresa billed has been raised of $ 10,000,000 and cash has been collected of $ 8,600,000.

5. Revenue for the sale of its single-family homes for the year 2016 = 5* (10% of $ 600,000) + (3*600,000)

= $ 2,100,000

6. The Citation will report in its balance sheet for the year end on December, 2016 ,that the company has undertaken a long term construction contract for the sale of its single-family homes and by 2016 it has completed sold 3 flats and from 5 customers it has received 10% deposits.

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