Project 101: Low-Rise Office Building aostrat as si ad The initial contract was
ID: 2490068 • Letter: P
Question
Project 101: Low-Rise Office Building aostrat as si ad The initial contract was signed on January 5, 2010 in the amount of $1,000,000. This amount included $800,000 for construction costs, $150,000 for overhead mark-up, and S50,000 for profit markup. The contractor broke ground on February 4, 2010. During the course of construction the client decided to upgrade the quality of the lighting and plumbing fixtures, resulting in a change order issued to the contractor in the amount of $100,000 on October 7, 2010. The change order price was calculated by the contractor as follows: $50,000 construction costs $37.500 overhead markup, $12,500 profit markup At the end of 2010, construction was not complete. However, the client was renting out office space to other entities as well as using some of the offices for the client's own business entity. Work remaining as of December 31, 2010 included surfacing the parking lot, erecting a portable parking attendant's station, miscellancous site concrete work and landscaping. This work was schedule to be completed by May 1, 2010, weather permitting. A summary of accounting data as of December 31, 2010 included total construction costs in the amount of $800,000 for which $600,000 was paid. The balance reflected unpaid bills for the month of December, and tention withheld on subcontracts throughout the course of the project. The total progress billing as of December 1, 2010 was $1,000,000 of which $900,000 was collected with the balance outstanding as retention receivable The project manager estimated that given the work left to be completed, approximately $200,000 of construction t oldd g h of constrnecion cost would be incurred.Explanation / Answer
1.Under Percentage completion method
2.Under billing Method
Billings-to-Contract Price Percentage of Completion Method = 90.91%(1,000,000/1,100,000)
Revenue can be recognised under this method =$ 1,000,000
Cost incurred =$ 800,000
Gross profit =$ 200,000
Comparision
Comment on contractor's Billing practice
If company follows billing method for revenue recognisation , Reporting revenu will be increased by 14% against revenue reporting under cost completion method. and Reporting Gross profit will be increased by 150% against Gross profit reporting under cost completion method.
$ Particulars 2010 Costs incurred to date 800,000 Estimated costs to complete 200,000 Total Cost 1,000,000 percentage-of-completion 80% (Costs incurred to date/Total cost Contract price- Initial 1,000,000 Add: Increased 100,000 Total Contract price 1,100,000 Revenue to be recognised for the year 2010 880,000 (Contract price*percentage-of-completion) Costs incurred to date 800,000 Profit or loss to be recognised for the year 2010 80,000Related Questions
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