Citation Builders, Inc., builds office buildings and single-family homes. The of
ID: 2772077 • 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 2016, Citation began construction of an office building for Altamont Corporation. The total contract price is $18 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:
Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts.
How much revenue related to this contract will Citation report in its 2016 and 2017 income statements?
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017? (Loss amounts should be indicated with a minus sign.)
What will Citation report in its December 31, 2016, balance sheet related to this contract? (Ignore cash.)
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 $18 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:
Explanation / Answer
a) The process to calulate Revenue is as follows :
1.Compute Gross profit of completed contract = Contract Price - Estimated Total Cost 2. Compute % complete = Total Cost to date/ total estimated cost of contract 3. Compute gross profit earned = Gross profit of completed contract ( step 1) * % complete (step 2) 4. Gross profit earned for the current year = Profit to date at the current year end - profit to date at the beginning of the year 5.Revenue for the current period = Grosss profit earned to date + costs incurred till date - revenue of prior periods calculation for Year 2016 1. Gross profit of completed contract = Contract Price - Estimated Total Cost 18000000 - 14850000 3150000 2. Compute % complete = Total Cost to date/ total estimated cost of contract = 3600000/14850000 * 100 24.24 3. Compute gross profit earned = Gross profit of completed contract ( step 1) * % complete (step 2) 3150000 * 24.24% 763636.36 4. Gross profit earned for the current year = Profit to date at the current year end - profit to date at the beginning of the year = 763636.36 - 0 763636.36 Revenue for the current period = Grosss profit earned to date + costs incurred till date - revenue of prior periods '= 763636.36 + 3600000 - 0 4363636.36 Calculation for Year 2017 1. Gross profit of completed contract = Contract Price - Estimated Total Cost 18000000 - 14850000 3150000 2. Compute % complete = Total Cost to date/ total estimated cost of contract = (3600000+8550000)/14850000 * 100 81.82 3. Compute gross profit earned = Gross profit of completed contract ( step 1) * % complete (step 2) 3150000 * 81.82% 2577272.73 4. Gross profit earned for the current year = Profit to date at the current year end - profit to date at the beginning of the year = 2577272.73-763636.36 1813636.36 Revenue for the current period = Grosss profit earned to date + costs incurred till date - revenue of prior periods '= 2577272.73+ 12150000 - 4363636.36 10363636 b. Gross Profit / Loss Year 2016 Gross profit earned for the current year = Profit to date at the current year end - profit to date at the beginning of the year = 763636.36 - 0 763636.36 as per step 4 in answer a for year 2016 Year 2017 4. Gross profit earned for the current year = Profit to date at the current year end - profit to date at the beginning of the year = 2577272.73-763636.36 1813636.36 as per step 4 in answer a for year 2017 c .Citation will report the following in its Balance sheet of December 31,2016 Current Assets : Cost incurred during the year- construction in progress 3600000 Less : Billing During the year 1800000 Construction in progress 1800000Related Questions
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