Can anyone help me through this one? It\'s a bit overwhelming. Intermediate Acco

Question

Can anyone help me through this one? It's a bit overwhelming.

Intermediate Accounting (8th Edition) Chapter 5 Problem 13 (P5-13) Pages 293 - 294.

(I could not direct link, so I took screenshots of the problem)

Problem 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 2016, Citation began construction of an office building for Altamont Corporation. The total contract price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows 2016 2017 2018 Costs incurred during the year $4,000,000 $9,500,000 $4,500,000 Estimated costs to complete as of year-end 12,000,000 4,500,000 Billings during the year 2,000,000 10,000,0008,000,000 Cash collections during the year 1,800,000 8,600,0009,600,000 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

Explanation / Answer

1. Recongnising revenue over time means that the revenue and costs incurred in a praticular period is calculated as a percentage of the total estimated costs. A percent of total cost is recognised every period till the final completion.

Recognising revenue upon completion means that the revenue is recognised at the time of delivery to the customer. No recognition is done at the project-in-progress period.

2. (a) Under completed contract method, no revenue will be reported for years 2016 and 2017

(b) No gross profit will be reported

(c) Actual cost incurred will be shown : for 2016 = $4,000,000            for 2017 = $9,500,000

3. Percentage completion method:

(a) Revenue for 2016 = Actual cost incurred to date/ Total estimated cost * Contract price = 4,000,000/16,000,000 * 20,000,000 = $5,000,000

Revenue for 2017 = Actual cost incurred to date / Total estimated cost * Contract price - Revenue recognised in 2016 = 13,500,000/18,000,000 * 20,000,000 - 5,000,000 = $10,000,000

(b) Gross profit recognition:

2016 = Revenue recognised - Cost incurred during the year = 5000000 - 4000000 = $1,000,000

2017 = 10000000 - 9500000 = $500,000

(c) Balance sheet in 2016 = Revenue (or Cost + Profit) for 2016 - billings during the year = 5,000,000 - 2,000,000 = $3,000,000

4.

(a) Revenue of 2017 = Actual cost incurred to date / Total estimated cost * Contract price - Revenue recognised in 2016 = 13,500,000/22,500,000 * 20,000,000 - 5,000,000 = $7,000,000

(b) Profit for 2017 = Revenue recognised - Cost incurred during the year = 7000000 - 9500000 = -$2,500,000

(c) Balance sheet in 2017 = Revenue (or Cost + Profit) for 2016+2017 - billings till 2017 = (5,000,000 + 7,000,000) - (2,000,000 +10,000,000) = $0

2016 2017 Contract price 20,000,000 20,000,000 Cost incurred during the year 4,000,000 9,500,000 Cost incurred to date 4,000,000 13,500,000 Estimated cost to complete 12,000,000 4,500,000 Total estimated costs 16,000,000 18,000,000 Estimated gross profit 4,000,000 2,000,000

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

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