Question

In spring 2014, Eva Engineering Company signed a contract with the city of Springfield, to construct a new city hall. Eva expects to construct the building within two years and incur expenses of $120 million, which means the company earns a $40 million profit on the contract. The city of Springfield paid $40 million when the contract was signed, $80 million within the next six months, and the final $40 million exactly one year from the signing of the contract. Eva incurred $48 million in costs during 2014 and rest in 2015 to complete the contract on time.

Using the percentage-of-completion method how much revenue should Eva recognize in 2014? What profit from the Springfield contract, will the company report each year? Show all computations.

Revenue:   

2014:

2015:

Profit:   

2014:

2015:

b. Please list at least 3 ways that management can manage their earnings with this construction cost method.

1.

2.

3.

Answer 1

All amount in $ millions	2014	2015
Cost incurred	48	72
Divided by: Total cost	120	120
Percentage-of-completion	40%	60%
Contracted Sales	160	160
Multiply by: Percentage-of-completion	40%	60%
Revenue recognized during year	64	96
Revenue recognized during year	64	96
Less: cost incurred	48	72
Profit	16	24
Please list at least 3 ways that management can manage their earnings with this construction cost method.
Sales Basis
Installment (on basis of cash collection)
Percentage of Completion
Cost Recoverability Method