Citation Builders, Inc., builds office buildings and single-family homes. The of
ID: 2529540 • Letter: C
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. During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $13 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: 2018 2019 2020 Costs incurred during the year $ 2,600,000 $ 6,175,000 $ 2,925,000 Estimated costs to complete as of year-end 7,800,000 2,925,000 — Billings during the year 1,300,000 6,500,000 5,200,000 Cash collections during the year 1,170,000 5,030,000 6,800,000 Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $680,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $680,000 each by the buyers. The completed homes cost $510,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $3,060,000. Required: 1. Which method is most equivalent to recognizing revenue at the point of delivery? 2. Answer the following questions assuming that Citation uses the completed contract method for its office building contracts: 2-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 2-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 2-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.) 3. Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts. 3-a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements? 3-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019? 3-c. What will Citation report in its December 31, 2018, balance sheet related to this contract? (Ignore cash.) 4. Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $5,850,000. Citation uses the percentage-of-completion method for its office building contracts. 4-a. How much revenue related to this contract will Citation report in the 2019 income statement? 4-b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019? 4-c. What will Citation report in its 2019 balance sheet related to this contract? (Ignore cash.) 5. Which method of accounting should Citation Builders, Inc adopt for its single-family houses? 6. What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?
Explanation / Answer
1) Percentage of completion method
2016
2017
2018
Contrat price C
$18,000,000
$18,000,000
$18,000,000
Actual cost
3600000
8550000
4050000
Cost incurred till date A
3600000
12150000
16200000
Estimated cost to complete E
10800000
4050000
Total esti mated project cost P
14400000
16200000
16200000
Estimated Total gross profit G= P-A
$3,600,000
$1,800,000
$1,800,000
Percentage of completion
Cost incurred/total estmated cost*100 A/E*100
25
75
100
Revenue to be recognized C*% of completion
4500000
13500000
18000000
Gross profit recognized G*A
$900,000
$1,350,000
$1,800,000
Less: Gross profit recognized in last year
$900,000
$1,350,000
Total Gross profit for each year
$900,000
$450,000
$450,000
Completed Contract
Revenue
Gross Profit
2016
0
0
2017
0
0
2018
$18,000,000
$1,800,000
If any doubt please comment
Ans 1 Completed Contract
In completed contract method the revnue is recognized when the project is completed
so it is equivalent to recognizing revenue at point of delivery.
Ans 2
Completed contrcat methiod is used
2016
2017
a)Revenue recognized
0
0
b) Gross profit
0
0
c) Current assets
Construction in process
3600000
Ans 3
Percentage of completion method
2016
2017
a)Revenue recognized
4500000
13500000
b) Gross profit
900000
1350000
c) Current assets
Construction in process
3600000
Less: Billings on construction
1800000
1800000
Answer 4
2016
2017
2018
Contract price C
$18,000,000
$18,000,000
$18,000,000
Actual cost
3600000
8550000
4050000
Cost incurred till date A
3600000
12150000
16200000
Estimated cost to complete E
10800000
8100000
Total estimated project cost P
14400000
20250000
16200000
Estimated Total gross profit G= P-A
$3,600,000
($2,250,000)
$1,800,000
Percentage of completion
Cost incurred/total estimated cost*100 A/E*100
25
60
100
Revenue to be recognized C*% of completion
4500000
10800000
18000000
Gross profit recognized G*A
$900,000
($1,350,000)
$1,800,000
Less: Gross profit recognized in last year
$900,000
($1,350,000)
Total Gross profit for each year
$900,000
($2,250,000)
$3,150,000
a)Revenue recognized
10800000
b) Gross profit
($1,350,000)
c) Current assets
Construction in process
3600000
Less: Billings on construction
1800000
1800000
Current liabilities
Various Accounts payable
3600000
1) Percentage of completion method
2016
2017
2018
Contrat price C
$18,000,000
$18,000,000
$18,000,000
Actual cost
3600000
8550000
4050000
Cost incurred till date A
3600000
12150000
16200000
Estimated cost to complete E
10800000
4050000
Total esti mated project cost P
14400000
16200000
16200000
Estimated Total gross profit G= P-A
$3,600,000
$1,800,000
$1,800,000
Percentage of completion
Cost incurred/total estmated cost*100 A/E*100
25
75
100
Revenue to be recognized C*% of completion
4500000
13500000
18000000
Gross profit recognized G*A
$900,000
$1,350,000
$1,800,000
Less: Gross profit recognized in last year
$900,000
$1,350,000
Total Gross profit for each year
$900,000
$450,000
$450,000
Completed Contract
Revenue
Gross Profit
2016
0
0
2017
0
0
2018
$18,000,000
$1,800,000
If any doubt please comment
Ans 1 Completed Contract
In completed contract method the revnue is recognized when the project is completed
so it is equivalent to recognizing revenue at point of delivery.
Ans 2
Completed contrcat methiod is used
2016
2017
a)Revenue recognized
0
0
b) Gross profit
0
0
c) Current assets
Construction in process
3600000
Ans 3
Percentage of completion method
2016
2017
a)Revenue recognized
4500000
13500000
b) Gross profit
900000
1350000
c) Current assets
Construction in process
3600000
Less: Billings on construction
1800000
1800000
Answer 4
2016
2017
2018
Contract price C
$18,000,000
$18,000,000
$18,000,000
Actual cost
3600000
8550000
4050000
Cost incurred till date A
3600000
12150000
16200000
Estimated cost to complete E
10800000
8100000
Total estimated project cost P
14400000
20250000
16200000
Estimated Total gross profit G= P-A
$3,600,000
($2,250,000)
$1,800,000
Percentage of completion
Cost incurred/total estimated cost*100 A/E*100
25
60
100
Revenue to be recognized C*% of completion
4500000
10800000
18000000
Gross profit recognized G*A
$900,000
($1,350,000)
$1,800,000
Less: Gross profit recognized in last year
$900,000
($1,350,000)
Total Gross profit for each year
$900,000
($2,250,000)
$3,150,000
a)Revenue recognized
10800000
b) Gross profit
($1,350,000)
c) Current assets
Construction in process
3600000
Less: Billings on construction
1800000
1800000
Current liabilities
Various Accounts payable
3600000
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