A construction company entered into a fixed-price contract to build an office bu

Question

A construction company entered into a fixed-price contract to build an office building for $20 million. Construction costs incurred during the first year were $6 million and estimated costs to complete at the end of the year were $9 million. The building was completed during the second year. Construction costs incurred during the second year were $10 million. How much revenue and gross profit or loss will the company recognize in the first and second year if it recognizes revenue upon contract completion?

Explanation / Answer

Gross profit and Revenue in First year: Actual Cost incurred 6,000,000 Revneu to be recognized 6,000,000 Gross profit recognized Nil Note: As per Completed contract method, the revenue is treated for the same amount to cover the cost. Therfore, no Gross profit shall be recognized in the perior years, but only in the year of compleetion. Gross profit and Revenue in the Second Yer (Year of completion) Total contract price 18,000,000 Less: Revenue recognized in Year-1 6,000,000 Revenue recognized in Year-2 12,000,000 Less: Cost incurred in Year-2 10,000,000 Gross Profit recognized in Year-2 2,000,000

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