CHAPTER 5 Revenue Recognition and Profitability Analysis 285 On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): E 5–18 Long-term contract; revenue recognition over time vs. upon project completion ● LO5–9 2016 2017 2018 Costs incurred during the year $ 40 $80 $50 Estimated costs to complete as of December 31 120 60 — Required: 1. How much revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion? 2. How much revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming this project does not qualify for revenue recognition over time? 3. Suppose the estimated costs to complete at the end of 2017 are $80 million instead of $60 million. Determine the amount of revenue and gross profit or loss to be recognized in 2017 assuming Sanderson recognizes revenue over time according to percentage of completion. On February 1, 2016, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2016, costs of $2,000,000 were incurred with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000. In 2017, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2017 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2018 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. Arrow recognizes revenue over time according to percentage of completion. Required: 1. Calculate the amount of revenue and gross profit or loss to be recognized in each of the three years. 2. Prepare journal entries for 2016 and 2017 to record the transactions described (credit “various accounts” for construction costs incurred). 3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2016 and 2017. This is a variation of Exercise 5–19 focusing on the revenue recognition upon project completion. On February 1, 2016, Arrow Construction Company entered into a three-year construction contract to build a bridge for a price of $8,000,000. During 2016, costs of $2,000,000 were incurred, with estimated costs of $4,000,000 yet to be incurred. Billings of $2,500,000 were sent, and cash collected was $2,250,000. In 2017, costs incurred were $2,500,000 with remaining costs estimated to be $3,600,000. 2017 billings were $2,750,000, and $2,475,000 cash was collected. The project was completed in 2018 after additional costs of $3,800,000 were incurred. The company’s fiscal year-end is December 31. This project does not qualify for revenue recognition over time. Required: 1. Calculate the amount of gross profit or loss to be recognized in each of the three years. 2. Prepare journal entries for 2016 and 2017 to record the transactions described (credit “various accounts” for construction costs incurred). 3. Prepare a partial balance sheet to show the presentation of the project as of December 31, 2016 and 2017. Indicate whether any of the amounts shown are contract assets or contract liabilities. Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2016 and was completed in 2018. The following is a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars. E 5–19 Long-term contract; revenue recognition over time; loss projected on entire project ● LO5–9 E 5–20 Long-term contract; revenue recognition upon project completion; loss projected on entire project ● LO5–8, LO5–9 E 5–21 Income (loss) recognition; Long-term contract; revenue recognition over time vs. upon project completion ● LO5–9 Costs Incurred During Year Estimated Costs to Complete (As of the End of the Year) Situation 2016 2017 2018 2016 2017 2018 1 1,500 2,100 900 3,000 900 — 2 1,500 900 2,400 3,000 2,400 — 3 1,500 2,100 1,600 3,000 1,500 — 4 500 3,000 1,000 3,500 875 — 5 500 3,000 1,300 3,500 1,500 — 6 500 3,000 1,800 4,600 1,700 —
Spiceland_Inter_Accounting8e_Ch05
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