On June 15 2018 Sanderson Construction entered into a longte

On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $310 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions): 2018 2019 2020 $ 70 $60 $30 Costs incurred during the year Estimated costs to complete as of December 31 130 30 Required 1. Compute the revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 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 2018, 2019, and 2020 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 2019 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2019 using the percentage of completion method

Solution

1.

2018

2019

2020

Estimated Total gross profit(loss)

110

Actual total gross profit (loss)

150

150

Explanation:

  ($ in millions)

2018

2019

2020

  Contract price

$

310

$

310

$

310

  Actual costs to date

70

130

160

  Estimated costs to complete

130

30

- 0 -

  Total estimated costs

200

160

160

  Estimated gross profit (loss) (actual in 2018)

$

110

$

150

$

150

2.

Percentage of Completion:

Choose numerator

/

Choose denominator

=

%complete to date

2018

70

/

200

=

38.50%

2019

130

/

160

=

83.00%

2020

150%

2018

To date

Recognized in prior years

Recognized in 2018

Construction Revenue

108.50

108.50

Construction Expense

(70)

(70)

Gross profit(loss)

38.50

38.50

2019

Construction Revenue

251.00

108.50

142.50

Construction Expense

130

70

60

Gross profit(loss)

121

38.50

82.50

2020

Construction Revenue

310.00

251.00

59.00

Construction Expense

160.00

130.00

30

Gross profit(loss)

150.00

121.00

29.00

Gross profit (loss) recognition:

2018:

$70

= 35% × $110 = $38.50

$200

2019:

$130

= 81.00% × $150 = $121.50 – $38.50 = $83.00

$160

2020: $310 – 160 = $150 – ($38.50 + 83.00) = $28.50

Revenue recognition:

2018:

$70

= 35% × $310 = $108.50

$200

  

2019:

$130

= 81.00% × $310 = $251.00 – $108.50 = $142.50

$160

2020: $310 – ($108.50 + $142.50) = $59.00

3.

Percentage of Completion:

Choose numerator

/

Choose denominator

=

%complete to date

Actual costs to date

Estimated total costs

2019

130

260

50.00%

Revenue recognition:

2019:

$130

= (50% × $310) – $142.50 = $12.50

$260

Gross profit (loss) recognition:

2019:

$130

= 50% × $50* = $25.00 – 38.50 = $(13.50) loss

$260

*$310 – ($70+ 60 + 130) = $50

	2018	2019	2020
Estimated Total gross profit(loss)	110
Actual total gross profit (loss)		150	150