Question

On January 1, Year 1, a contractor began work on a $3.2 million construction contract that is expected to be completed in 3 years. The contractor concludes that it is appropriate to recognize revenue over time using the input method based on costs incurred (cost-to-cost method). At the inception date, the estimated cost of construction was $2.4 million. The following data relate to the actual and expected construction costs:
Year 1 Year 2 Year 3
Cost incurred $720,000 $1,170,000 $1,110,000
Expected future costs $1,680,000 $810,000 $0
For this long-term construction contract, the contractor needs to calculate the estimated dollar values of the revenue and gross profit (loss) to be recognized each year.
Complete the contractor's long-term construction contract using the information above.
Revenue Gross Profit (loss)
Year 1
Year 2
Year 3

Answer 1

Answer:

Contractor's Long-term Construction Contract Table:

                 Revenue     Gross Profit (loss)

Year 1       $960,000       $240,000

Year 2    $1,386,667        $216,667

Year 3      $853,333      ($256,667)

Total     $3,200,000      $200,000

Explanation:

a) Data and Calculations:

Contract price = $3.2 million

Estimated cost of construction = $2.4 million

Actual and expected construction costs:

                                           Year 1       Year 2       Year 3

Cost incurred                  $720,000 $1,170,000 $1,110,000

Expected future costs $1,680,000    $810,000             $0

Revenue                        $

Year 1 = $720,000/$2,400,000 * $3.2 million = $960,000

Year 2 = $1,170,000/$2,700,000 * $3.2 million = $1,386,667

Year 3 = $853,333

                 Revenue     Gross Profit (loss)

Year 1       $960,000       $240,000 ($960,000 - $720,000)

Year 2    $1,386,667        $216,667 ($1,386,667 - $1,170,000)

Year 3      $853,333      ($256,667) ($853,333 - $1,110,000)

Total     $3,200,000      $200,000 ($3,200,000 - $3,000,000)