Question

Tamarisk Construction Company has entered into a contract beginning January 1, 2017, to build a parking complex. It has been estimated that the complex will cost $601,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $903,000. The following data pertain to the construction period.

		2017		2018		2019
Costs to date		$270,450		$492,820		$613,000
Estimated costs to complete		330,550		108,180		–0–
Progress billings to date		273,000		550,000		903,000
Cash collected to date		243,000		500,000		903,000

(a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.

b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period

Answer 1

Gross profit recognized each year under the Percentage of completion method = (Costs to date / Total estimated costs * Expected profit) - Previously recognized profits

	Gross profit
2017	$135,900 [{$270,450/($270,450+$330,550)*($903,000-$270,450-$330,550}-$0]
2018	$111,740 [{$492,820/($492,820+$108,180)*($903,000-$492,820-$108,180}-$135,900]
2019	$42,360 [{$613,000/$613,000*($903,000-$613,000)}-$135,900-$111,740]

--------------------------------------------------------------------

(b)

Under Completed contract method, Gross profit is recognized only on the completion of the contract.

	Gross profit
2017	$0
2018	$0
2019	$290,000 ($903,000-$613,000)