Question

On July 1, 2017, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of $1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2019, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2017, 2018, and 2019.

	At 12/31/17	At 12/31/18	At 12/31/19
Contract Costs Incurred to Date	$300,000	$1,200,000	$2,100,000
Estimated Costs to Complete the Contract	$1,200,000	$800,000	-0-
Billings to Gumbel	$300,000	$1,100,000	$1,850,000

Using the completed-contract method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore income taxes.)

(Please show how calculations are done? I've had a problem with finding out what goes in what order)

Answer 1

Under the completed contract method, profits are recognized only in the year of completion and the losses are recognized immediately in the year expected.

Profit/loss = (Costs to date / Estimated total costs * Estimated profits) - Previously recognized profits

2017 profits/loss = [$300,000 / ($300,000+$1,200.000) * ($1,900,000 - $300,000 - $1,200,000)] - $0

= $80,000

In case of losses recognize full loss.

2018 profits/loss = $1,900,000 - $1,200,000 - $800,000

= ($100,000)

2019 profit/loss = $2,100,000 - $1,900,000

= ($200,000) +$100,000

= ($100,000)

2017	$0 (as there is profit, it is not recognized)
2018	$100,000 loss (as there is loss recognize fully, not in proportion)
2019	$100,000 loss