Gifford Construction Corporation has entered into a long-term fixed contract to build a performing arts center for Philbin University.The fixed price is $71,500,000.The costs,estimated costs,and billing activity for the three years of the contract are shown below:
$20,995,00041,570,10071,500,000\begin{array}{llrr}&201&2014&2015\\\text { Construction costs incurred to date } & 20,000,000 & 45,000,000 & 70,000,000 \\\text { Estimated future costs } & 35,000,000 & 30,000,000 & 0 \\\text { Billings to date } & 24,700,000 & 43,758,000 & 71,500,000 \\\text { Cash collections to date } & 20,995,000 & 41,570,100 & 71,500,000\end{array}$
Required:
a.Compute the gross profit to be recognized under the percentage-of-completion method on Gifford's income statements for each year under the contract.
b.Compute construction in progress net of billings under the percentage-of-completion method at the end of 2013 and 2014.Be sure to indicate whether the balance is classified as an asset or liability.
c.Compute the gross profit to be recognized under the completed contract method on Gifford's income statements for each year under the contract.
d.Which method is more conservative:the percentage-of-completion method or the completed contract method? Explain.

Question

Gifford Construction Corporation has entered into a long-term fixed contract to build a performing arts center for Philbin University.The fixed price is $71,500,000.The costs,estimated costs,and billing activity for the three years of the contract are shown below: 201 2014 2015  Construction costs incurred to date  20 , 000 , 000 45 , 000 , 000 70 , 000 , 000  Estimated future costs  35 , 000 , 000 30 , 000 , 000 0  Billings to date  24 , 700 , 000 43 , 758 , 000 71 , 500 , 000  Cash collections to date  20 , 995 , 000 41 , 570 , 100 71 , 500 , 000 \begin{array}{llrr} & 201 & 2014 & 2015\	ext { Construction costs incurred to date }  &  20,000,000  &  45,000,000  &  70,000,000 \	ext { Estimated future costs }  &  35,000,000  &  30,000,000  &  0 \	ext { Billings to date }  &  24,700,000  &  43,758,000  &  71,500,000 \	ext { Cash collections to date }  &  20,995,000  &  41,570,100  &  71,500,000\end{array}  Construction costs incurred to date   Estimated future costs   Billings to date   Cash collections to date  ​ 201 20 , 000 , 000 35 , 000 , 000 24 , 700 , 000 20 , 995 , 000 ​ 2014 45 , 000 , 000 30 , 000 , 000 43 , 758 , 000 41 , 570 , 100 ​ 2015 70 , 000 , 000 0 71 , 500 , 000 71 , 500 , 000 ​ Required:a.Compute the gross profit to be recognized under the percentage-of-completion method on Gifford's income statements for each year under the contract.b.Compute construction in progress net of billings under the percentage-of-completion method at the end of 2013 and 2014.Be sure to indicate whether the balance is classified as an asset or liability.c.Compute the gross profit to be recognized under the completed contract method on Gifford's income statements for each year under the contract.d.Which method is more conservative:the percentage-of-completion method or the completed contract method? Explain.

Diana Jiang · Accepted Answer

Final Answer :   a. Gross profit for percentage-of-completion   method  2013 2014 2015  Total expected gross profit:   Contract price - (costs incurred to date  +  expected costs)  16 , 500 , 000 ( 3 , 500 , 000 ) 1 , 500 , 000  Percent complete  =  costs to date  ÷  total costs  36.36 % 60.00 % 100.00 %  Gross profit earned in year:   Percent complete  ×  expected gross profit -   gross profit in prior years  6 , 000 , 000 ( 9 , 500 , 000 ) 5 , 000 , 000 \begin{array}{l}	ext { a. Gross profit for percentage-of-completion }\	ext { method } & 2013 & 2014 & 2015\	ext { Total expected gross profit: }\	ext { Contract price - (costs incurred to date }+\	ext { expected costs) }  &  16,500,000  &  (3,500,000)  &  1,500,000 \	ext { Percent complete }=	ext { costs to date } \div 	ext { total costs }  &  36.36 \%  &  60.00 \%  &  100.00 \%\	ext { Gross profit earned in year: }\	ext { Percent complete } 	imes 	ext { expected gross profit - }\	ext { gross profit in prior years } & 6,000,000 & (9,500,000) & 5,000,000\end{array}  a. Gross profit for percentage-of-completion   method   Total expected gross profit:   Contract price - (costs incurred to date  +  expected costs)   Percent complete  =  costs to date  ÷  total costs   Gross profit earned in year:   Percent complete  ×  expected gross profit -   gross profit in prior years  ​ 2013 16 , 500 , 000 36.36% 6 , 000 , 000 ​ 2014 ( 3 , 500 , 000 ) 60.00% ( 9 , 500 , 000 ) ​ 2015 1 , 500 , 000 100.00% 5 , 000 , 000 ​  b. Net construction in progress  2013 2014  Construction in progress:   Costs to date  20 , 000 , 000 45 , 000 , 000  Gross profit to date  6 , 000 , 000 ( 3 , 500 , 000 ) 26 , 000 , 000 41 , 500 , 000  Billings to date  ( 24 , 700 , 000 ) ( 43 , 758 , 000 )  Net construction in progress  1 , 300 , 000 ( 2 , 258 , 000 )  Balance is classified as a:   Net asset   Net liability  \begin{array}{lrr}	ext { b. Net construction in progress } & 2013 & 2014\	ext { Construction in progress: }  &   &  \\quad 	ext { Costs to date }  &  20,000,000  &  45,000,000 \	ext { Gross profit to date }  &  6,000,000  &  (3,500,000) \ &  26,000,000  &  41,500,000 \	ext { Billings to date }  &  (24,700,000)  &  (43,758,000) \	ext { Net construction in progress }  &  1,300,000  &  (2,258,000) \	ext { Balance is classified as a: }  &  	ext { Net asset }  &  	ext { Net liability }\end{array}  b. Net construction in progress   Construction in progress:   Costs to date   Gross profit to date   Billings to date   Net construction in progress   Balance is classified as a:  ​ 2013 20 , 000 , 000 6 , 000 , 000 26 , 000 , 000 ( 24 , 700 , 000 ) 1 , 300 , 000  Net asset  ​ 2014 45 , 000 , 000 ( 3 , 500 , 000 ) 41 , 500 , 000 ( 43 , 758 , 000 ) ( 2 , 258 , 000 )  Net liability  ​ c. Gross profit under completed contract method  method  2013 2014 2015  Gross profit:  0 ( 3 , 500 , 000 ) 5 , 000 , 000 \begin{array}{lrrr}	ext { method }  &  \mathbf{2 0 1 3}  &  \mathbf{2 0 1 4}  &  \mathbf{2 0 1 5} \	ext { Gross profit: }  &  0  &  (3,500,000)  &  5,000,000\end{array}  method   Gross profit:  ​ 2013 0 ​ 2014 ( 3 , 500 , 000 ) ​ 2015 5 , 000 , 000 ​   d.The completed contract method is more conservative because no profits are recognized until the end of the contract,and losses are recognized as soon as they are predicted.Under the percentage-of-completion method,profits are recognized in accounting periods prior to the end of the contract.

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