chap005 3

chap005 3 - ot report gross profit until the project is...

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Unformatted text preview: ot report gross profit until the project is competed. Citation would have to report an overall gross loss on the contract in whatever period it first revises the estimates to determine that an overall loss will eventually occur. Citation never estimates the Altamont contract will earn a gross loss, so never has to recognize one. b. Under the completed contract method Citation would not report any revenue in the 2009 or 2010 income statements. Problem 5-8 (continued)c.#####Balance SheetAt December 31, 2009#####Current assets:#####Accounts receivable##$ 200,000###Costs ($4,000,000*) in excess of billings ($2,000,000)##2,000,000######## * Under the completed contract method, this account would only include costs of $4,000,000Requirement 3 2009 2010 Contract price $20,000,000 $20,000,000 Actual costs to date 4,000,000 13,500,000 Estimated costs to complete 12,000,000 4,500,000 Total estimated costs 16,000,000 18,000,000 Estimated gross profit $ 4,000,000 $ 2,000,000a. Gross profit recognition: 2009: $ 4,000,000 = 25% x $4,000,000 = $1,000,000 $16,000,000 2010: $13,500,000 = 75% x $2,000,000 = $1,500,000 $18,000,000 Less: 2009 gross profit 1,000,000 2010 gross profit $ 500,000b. 2009: $20,000,000 x 25% = $5,000,000# 2010: $20,000,000 x 75% = $15,000,000# Less: 2009 revenue (5,000,000) $10,000,000 Problem 5-8 (continued)c.#####Balance SheetAt December 31, 2009#####Current assets:#####Accounts receivable##$ 200,000###Costs and profit ($5,000,000*) in excess of billings ($2,000,000)##3,000,000######## * Costs ($4,000,000) + profit ($1,000,000)Requirement 4 2009 2010 Contract price $20,000,000 $20,000,000 Actual costs to date 4,000,000 13,500,000 Estimated costs to complete 12,000,000 9,000,000 Total estimated costs 16,000,000 22,500,000 Estimated gross profit $ 4,000,000 ($ 2,500,000)a. Gross profit recognition: p 2010: Overall loss of ($2,500,000) previously recognized gross profit of $1,000,000 = $3,500,000.b.2010: Easiest to solve using a journal entry: Cost of construction (to balance) $10,500,000 Revenue from long-term contracts* $7,000,000 Construction in progress (loss) $3,500,000*Total revenue recognized to date = (percentage complete)(total revenue) = ($13,500,000 / $22,500,000) x ($20,000,000) = (60%) x ($20,000,000) = $12,000,000 Revenue recognized this period = total & revenue recognized in prior periods = $12,000,000 & $5,000,000 = $7,000,000 Problem 5-8 (continued)c.#####Balance SheetAt December 31, 2010#####Current assets:#####Accounts receivableCurrent liabilities:##$ 200,000###Billings ($12,000,000) in excess of costs and profit ($11,000,000*) ##1,000,000######## * 2009 costs ($4,000,000) + 2009 profit ($1,000,000) + 2010 costs ($9,500,000) S 2010 loss ($3,500,000)Requirement 5Citation should recognize revenue at the point of delivery, when the homes are completed and title is transferred to the buyer. This is equivalent to the completed contract method for long-term contracts. The percentage-of-completion method is not appropriate in this case. The percentage-of-completion method is not appropriate in this case....
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This note was uploaded on 07/10/2011 for the course ACG 3101 taught by Professor Wodward during the Spring '08 term at FSU.

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chap005 3 - ot report gross profit until the project is...

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