Question

Hello , i need to know how to calculate   "Revenue from Long-Term Contracts" in part c .

could you please demonstrate from where that 8,960,000 came?

Thank you

Ex. 18-126—Percentage-of-completion method.

Penner Builders contracted to build a high-rise for $28,000,000. Construction began in 2014 and is expected to be completed in 2017. Data for 2014 and 2015 are:

                                                                                                     2014                2015    

            Costs incurred to date                                                $3,600,000    $10,400,000

            Estimated costs to complete                                      14,400,000        9,600,000

Penner uses the percentage-of-completion method.

Instructions

(a)   How much gross profit should be reported for 2014? Show your computation.

(b)   How much gross profit should be reported for 2015?

(c)   Make the journal entry to record the revenue and gross profit for 2015.

Solution 18-126

(a)    $3,600,000

         ————— × $10,000,000 = $2,000,000

         $18,000,000

(b)    $10,400,000

         —————— × $8,000,000 =   $4,160,000

         $20,000,000

         Less 2014 gross profit             2,000,000

         Gross profit in 2015                  $2,160,000

(c)    Construction in Process................................................................. 2,160,000

         Construction Expenses.................................................................. 6,800,000

                     Revenue from Long-Term Contracts.................................                        8,960,000

Answer 1

First of all let’s see the formula of Revenue from long-term contracts;

As we know that revenue = Cost (Expenses) + Gross profit

Thus Revenue from long-term contracts = Construction expenses + Gross profit

So Revenue from long-term contracts ($6800000 + $2160000) = $8960000

You have already calculated gross profit and construction expenses for 2015, so when we add construction expenses and gross profit of 2015 then we will find $8960000

Construction profit for 2015 is given in the part (b) = $2160000

Construction expenses for 2015 ($10400000 – $3600000) = $6800000

Hence Revenue from long-term contracts ($6800000 + $2160000) = $8960000