Asked by Baylee Johnson on May 10, 2024
Verified
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:
20120142015 Construction costs incurred to date 20,000,00045,000,00070,000,000 Estimated future costs 35,000,00030,000,0000 Billings to date 24,700,00043,758,00071,500,000 Cash collections to date 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} Construction costs incurred to date Estimated future costs Billings to date Cash collections to date 20120,000,00035,000,00024,700,00020,995,000201445,000,00030,000,00043,758,00041,570,100201570,000,000071,500,00071,500,000
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.
Percentage-Of-Completion Method
An accounting method used to recognize revenue and expenses of long-term contracts as a percentage of work completed during the period.
Completed Contract Method
The Completed Contract Method is an accounting approach where revenue and expenses of a contract are recorded only when the contract is completed.
Construction In Progress
An accounting term for the total cost incurred for constructing long-term, physical, non-current assets that are not yet completed at the end of a company’s accounting period.
- Apply the percentage-of-completion and completed contract methods for long-term construction contracts and evaluate their conservatism.
Verified Answer
b. Net construction in progress 20132014 Construction in progress: Costs to date 20,000,00045,000,000 Gross profit to date 6,000,000(3,500,000)26,000,00041,500,000 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}\text { b. Net construction in progress }&2013&2014\\\text { Construction in progress: } & & \\\quad \text { Costs to date } & 20,000,000 & 45,000,000 \\\text { Gross profit to date } & 6,000,000 & (3,500,000) \\& 26,000,000 & 41,500,000 \\\text { Billings to date } & (24,700,000) & (43,758,000) \\\text { Net construction in progress } & 1,300,000 & (2,258,000) \\\text { Balance is classified as a: } & \text { Net asset } & \text { 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: 201320,000,0006,000,00026,000,000(24,700,000)1,300,000 Net asset 201445,000,000(3,500,000)41,500,000(43,758,000)(2,258,000) Net liability
c. Gross profit under completed contract method
method 201320142015 Gross profit: 0(3,500,000)5,000,000\begin{array}{lrrr}\text { method } & \mathbf{2 0 1 3} & \mathbf{2 0 1 4} & \mathbf{2 0 1 5} \\\text { Gross profit: } & 0 & (3,500,000) & 5,000,000\end{array} method Gross profit: 201302014(3,500,000)20155,000,000 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.
Learning Objectives
- Apply the percentage-of-completion and completed contract methods for long-term construction contracts and evaluate their conservatism.
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