Citation Builders, Inc., builds office buildings and
single-family homes. The office buildings are constructed under
contract with reputable buyers. The homes are constructed in
developments ranging from 10–20 homes and are typically sold during
construction or soon after. To secure the home upon completion,
buyers must pay a deposit of 10% of the price of the home with the
remaining balance due upon completion of the house and transfer of
title. Failure to pay the full amount results in forfeiture of the
down payment. Occasionally, homes remain unsold for as long as
three months after construction. In these situations, sales price
reductions are used to promote the sale.
During 2018, Citation began construction of an office building for
Altamont Corporation. The total contract price is $13 million.
Costs incurred, estimated costs to complete at year-end, billings,
and cash collections for the life of the contract are as
follows:
| 2018 | 2019 | 2020 | |||||||||
| Costs incurred during the year | $ | 2,600,000 | $ | 6,175,000 | $ | 2,925,000 | |||||
| Estimated costs to complete as of year-end | 7,800,000 | 2,925,000 | — | ||||||||
| Billings during the year | 1,300,000 | 6,500,000 | 5,200,000 | ||||||||
| Cash collections during the year | 1,170,000 | 5,030,000 | 6,800,000 | ||||||||
Also during 2018, Citation began a development consisting of 12
identical homes. Citation estimated that each home will sell for
$680,000, but individual sales prices are negotiated with buyers.
Deposits were received for eight of the homes, three of which were
completed during 2018 and paid for in full for $680,000 each by the
buyers. The completed homes cost $510,000 each to construct. The
construction costs incurred during 2018 for the nine uncompleted
homes totaled $3,060,000.
Required:
1. Which method is most equivalent to
recognizing revenue at the point of delivery?
2. Answer the following questions assuming that
Citation uses the completed contract method for its office building
contracts:
2-a. How much revenue related to this contract
will Citation report in its 2018 and 2019 income statements?
2-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2018 and 2019?
2-c. What will Citation report in its December 31,
2018, balance sheet related to this contract? (Ignore cash.)
3. Answer the following questions assuming that
Citation uses the percentage-of-completion method for its office
building contracts.
3-a. How much revenue related to this contract
will Citation report in its 2018 and 2019 income statements?
3-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2018 and 2019?
3-c. What will Citation report in its December 31,
2018, balance sheet related to this contract? (Ignore cash.)
4. Assume the same information for 2018 and 2019,
but that as of year-end 2019 the estimated cost to complete the
office building is $5,850,000. Citation uses the
percentage-of-completion method for its office building
contracts.
4-a. How much revenue related to this contract
will Citation report in the 2019 income statement?
4-b. What is the amount of gross profit or loss to
be recognized for the Altamont contract during 2019?
4-c. What will Citation report in its 2019 balance
sheet related to this contract? (Ignore cash.)
5. Which method of accounting should Citation
Builders, Inc adopt for its single-family houses?
6. What will Citation report in its 2018 income
statement and 2018 balance sheet related to the single-family home
business (ignore cash in the balance sheet)?
1. Completed contract method is more equivalent to recognise the revenue at the point of delivery.
2.
| 2018 | 2019 | |
| Price | 13,000,000 | 13,000,000 |
| (A) Cost incurred | 2,600,000 | 6,175,000 |
| Estimated future cost | 7,800,000 | 2,925,000 |
| (B) Total cost | 10,400,000 | 9,100,00 |
| (C) Gross profit (13,000,000-B) | 2600000 | 3900000 |
| Percentage complete (A/B) | 25% | 68% |
| Revenue recognised to date | 650000 | 200200 |
| GP recognised | 650,000 | 200,200 |
|
2600000*25% =650000 |
3900000*68% =2652000-650000 =200200 |
2 a, Under completed contract method, it would not report any revenue.
2 b, If revenue is recognized under project completion, it would not report any revenue in 2018 and 2019.
3 a. Revenue recognition
2018: (600000/10400000)* 25% * 2600000 = 650000
2019: (6175000/9100000)*68%*3900000 = 2652000
3b GP recognition
25%* 13000000 = 3250000 - 2600000 = 650000
68%*13000000 = 8840000-6175000 = 2665000
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