Exercise_1_-_Solution[1]

Exercise_1_-_Solution[1] - Long-term Construction Contracts...

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Long-term Construction Contracts Revenue Recognition % of Completion and Completed Contract Methods Exercise 1 - 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. You begin construction in 2003, and you expect to complete the project in 2005. The following data relate to your progress on the construction of this garage at the end of each year: 2003 2004 2005 Costs expended this year $1,800,000 $510,000 $2,690,000 Estimated costs to complete 2,700,000 3,190,000 ----- Progress billings 2,000,000 2,000,000 2,000,000 Cash collected 1,500,000 2,000,000 2,500,000 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 2,310,000 5,000,000 / Estimated total costs 4,500,00 5,500,000 5,000,000 = % Complete 40% 42% 100% Contract price 6,000,000 6,000,000 6,000,000 x % complete 40% 42% 100% = Revenue recognized to date 2,400,000 2,520,000 6,000,000 − Revenue recogn. prior -0- (2,400,000) (2,520,000) = Revenue recogn. current 2,400,000 120,000 3,480,000 Estimated total gross profit 1,500,000 500,000 1,000,000 x % complete 40% 42% 100% = Gross profit recognized to date 600,000 210,000 1,000,000 − Gross profit recogn. prior -0- (600,000) (210,000) = Gross profit recogn. current 600,000 (390,000) 790,000
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The purpose of the above spreadsheet is to help you learn to analyze and understand how the numbers related to the above transaction are working. Do not become co-dependent on the form because in real life you will not use the form. You will be expected to know how to calculate or determine if the information you are analyzing / auditing is correct. Start by looking at each year’s of information separately. 2003 Costs expended to date (means prior year (PY) plus current year (CY) actual costs incurred). Since this is the first year of contract there are no PY costs to include. Therefore, costs expended to date for 2003 are $1,800,000.
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Exercise_1_-_Solution[1] - Long-term Construction Contracts...

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