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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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In 2019, Tarlo Company agrees to construct a highway for Brice County over a 3 year period (2019 through 2021). The contract price is $1, 200, 000, and the construction costs (both actual and estimated) total $705, 000 for the 3 years. Tarlo’s estimate of progress toward satisfaction of the performance obligation at the end of each year is as follows: 2019, 20%; 2020, 75%; 2021, 100%.

Required:

  1. 1. Prepare a schedule showing the amount of gross profit that Tarlo recognizes each year assuming the performance obligation is determined to be satisfied over time.
  2. 2. Prepare a schedule showing the amount of gross profit that Tarlo recognizes each year assuming the performance obligation is satisfied at a point in time.

1.

To determine

Prepare a schedule showing the amount of gross profit recognized by Company T by assuming that performance obligation is ascertained to be satisfied over time.

Explanation

Contract: Contract is an agreement among two parties or more parties which includes enforceable obligations and rights. A contract can be “written oral or implied” by ordinary business practices.

Revenue recognition by Companies: Companies must recognise revenues to represent the “Transmission of promised goods and services to customers in an amount that reflects the consideration” to which the entity anticipates to be authorized in exchange for those good and services.

Prepare a schedule:

Revenue recognized over time
20192020 2021
Gross profit(1)$99,000(2)$272,250 (3)$123,750

Table (1)

Therefore, the total gross profit assuming that the performance obligation is determined to be satisfied over time is $495,000($99,000+$272,250+$123,750) .

Working notes:

(1)Calculate the gross profit for the year 2019:

Grossprofit=[(ContractpriceConstructioncosts)×Percentageoftotalestimatedprogressduring2019]=[($1,200,000$705,000)×20%]=$99,000

(2)Calculate the gross profit for the year 2020:

Grossprofit=[(ContractpriceConstructioncosts)

2.

To determine

Prepare a schedule showing the amount of gross profit recognized by Company T by assuming that performance obligation is ascertained at a point in time.

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