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Exercise_2_-_Solution[1]

# Exercise_2_-_Solution[1] - Long-term Construction Contracts...

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Long-term Construction Contracts Revenue Recognition % of Completion Method Handout Exercise 2 - Solution Your Co. has won the contract to build a parking garage on FAU’s Davie Campus. The contract has a fixed price of \$6,000,000. During 2003, costs of \$1,800,000 were incurred with estimated costs of \$2,700,000 yet to be incurred. Billings of \$3,000,000 were sent and cash collected was \$1,500,000. In 2004, costs incurred were \$1,700,000 with remaining costs estimated to be \$3,500,000. 2004 billings were \$500,000 and \$2,000,000 cash was collected. The project was completed in 2005 after additional costs of \$3,800,000 were incurred. 2005 billings were \$2,500,000 and \$2,500,000 cash was collected. The company’s fiscal year end is December 31. Your Co. uses the percentage-of completion method. Set up a “spreadsheet” to calculate: % complete, revenue to be recognized in each year, and gross profit to be recognized in each year. 2003 2004 2005 Costs expended to date 1,800,000 3,500,000 7,300,000 / Estimated total costs 4,500,000 7,000,000 7,300,000 = % Complete 40% 50% 100 % Contract price 6,000,000 6,000,000 6,000,000 x % complete 40% 50% 100 % = Revenue recognized to date 2,400,000 3,000,000 6,000,0000 − Revenue recogn. prior -0- (2,400,000) (3,000,000) = Revenue recogn. current 2,400,000 600,000 3,000,000 Estimated total gross profit 1,500,000 (1,000,000) (1,300,000) x % complete 40% Entire loss gets booked Entire loss gets booked = Gross profit

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Exercise_2_-_Solution[1] - Long-term Construction Contracts...

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