Question

On June 15, 2021, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2023, just in time for the 2023 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
2021 2022 2023
Costs incurred during the year $40 $80 $50
Estimated costs to complete as of December 31 120 60
Required:
1. Compute the revenue and gross profit will Sanderson report in its 2021, 2022, and 2023 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion. 2. Compute the revenue and gross profit will Sanderson report in its 2021, 2022, and 2023 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 2022 are $80 million instead of $60 million. Compute the amount of revenue and gross profit or loss to be recognized in 2022 assuming Sanderson recognizes revenue over time according to percentage of completion.

Answer 1

Answer:

1.

2021 Gross profit/loss $15

2022 Gross profit/loss $12

2023 Gross profit/loss $23

2.

2021 Revenue recognized  $0

2022 Revenue recognized $0

2023 Revenue recognized $220

2021 Gross profit/loss $0

2022 Gross profit/loss $0

2023 Gross profit/loss $50

3.Gross profit /loss ($3)

Explanation:

1. Computation of thr Gross Profit recognize over time assuming percentage of completion method

Using PERCENTAGE OF COMPLETION

Using this formula

Choose numerator ÷ Choose denominator = % complete to date

Actual costs to date÷ Estimated total costs= %  

2021 $40 ÷ $160=25.00%

(40+120)  

2022 $120(40+80) ÷$180(40+80+60) = 66.67%    

2023 170  170  =100.00%

(40+80+50)    

2021

To date - Recognized in prior years = Recognized in 2018

Construction revenue $55(220*25%) $0 $55

 

Less: Construction expense $40 $0 $40

Gross profit (loss) $15 $0 $15

2022

To date - Recognized in prior years = Recognized in 2019

Construction revenue $147(220*66.66%) $55 $92

Less: Construction expense $120(40+80) $40 $80

Gross profit (loss) $27 $15 $12

2023

To date - Recognized in prior years = Recognized in 2020

Construction revenue $220 $147 $73

 

Less: Construction expense $170(40+80+50) $120 $50

 

Gross profit (loss) $50 $27 $23

2. Calculation for the Statement showing revenue and gross profit assuming this project does not qualify for revenue recognition over time. ( $ in Million)

Year Revenue recognized Gross Profit (Loss) recognized

2021 $0  $0

2022 $0  $0

2023 $220 $50(220-170)

3  Computation of the Revenue and gross profit or loss to be recognized in 2022 (using the percentage of completion )

Percentages of completion

Choose numerator ÷ Choose denominator = % complete to date

Actual costs to date ÷Estimated total costs=%  

2022 $120(40+80) ÷ $200(40+80+80) = 60.00%  

2022

To date Recognized in prior years Recognized in 2019

Construction revenue $132(220*60) $55 $77

 

Less:Construction expense $120(40+80) $40 $80

Gross profit (loss) $12     $15 ($3)