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CHAPTER 5 Revenue Recognition and Profitability Analysis 293 Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2016, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,000,000. Curtiss concludes that the contract does not qualify for revenue recognition over time. The building was completed on December 31, 2018. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows: P 5–12 Long-term contract; revenue recognized over time; loss projected on entire project ● LO5–9 At 12-31-2016 At 12-31-2017 At 12-31-2018 Percentage of completion 10% 60% 100% Costs incurred to date $ 350,000 $2,500,000 $4,250,000 Estimated costs to complete 3,150,000 1,700,000 –0– Billings to Axelrod, to date 720,000 2,170,000 3,600,000 Required: 1. For each of the three years, prepare a schedule to compute total gross profit or loss to be recognized as a 2. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute gross profit 3. Assuming Curtiss recognizes revenue over time according to percentage of completion, compute the amount to be shown in the balance sheet at the end of 2016 and 2017 as either cost in excess of billings or billings in excess of costs. (AICPA adapted) 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 $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows: 2016 2017 2018 result of this contract. or loss to be recognized in each of the three years. Costs incurred during the year $ 4,000,000 $ 9,500,000 $4,500,000 Estimated costs to complete as of year-end 12,000,000 4,500,000 — Billings during the year 2,000,000 10,000,000 8,000,000 Cash collections during the year 1,800,000 8,600,000 9,600,000 P 5–13 Long-term contract; revenue recognition over time vs. upon project completion ● LO5–9 Also during 2016, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2016 and paid for in full for $600,000 each by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred during 2016 for the nine uncompleted homes totaled $2,700,000. Required: 1. Briefly explain the difference between recognizing revenue over time and upon project completion when accounting for long-term construction contracts. 2. Answer the following questions assuming that Citation concludes it does not qualify for revenue recognition over time for its office building contracts: a. How much revenue related to this contract will Citation report in its 2016 and 2017 income statements? b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017? c. What will Citation report in its December 31, 2016, balance sheet related to this contract? (Ignore cash.) 3. Answer requirements 2a through 2c assuming that Citation recognizes revenue over time according to percentage of completion for its office building contracts. 4. Assume the same information for 2016 and 2017, but that as of year-end 2017 the estimated cost to complete the office building is $9,000,000. Citation recognizes revenue over time according to percentage of completion for its office building contracts. a. How much revenue related to this contract will Citation report in the 2017 income statement? ✮


Spiceland_Inter_Accounting8e_Ch05
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