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Long-term contract; revenue recognition over time vs. upon project completion
• LO5–9
On June 15, 2018, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2020, just in time for the 2020 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
Required:
1. How much revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion?
2. How much revenue and gross profit will Sanderson report in its 2018, 2019, and 2020 income statements related to this contract assuming this project does not qualify for revenue recognition over time?
3. Suppose the estimated costs to complete at the end of 2019 are $80 million instead of $60 million. Determine the amount of revenue and gross profit or loss to be recognized in 2019 assuming Sanderson recognizes revenue over time according to percentage of completion.
Requirement – 1
Contract
Contract is a written document that creates legal enforcement for buying and selling the property. It is committed by the parties to performing their obligation and enforcing their rights.
Revenue recognized point of long term contract
A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized by revenue mines cost of completion until date.
A contract does not meet the performance obligation norm. The seller cannot recognize the revenue till the project complete.
The revenue recognition principle
The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.
The amount of revenue and gross profit or loss will report in 2018, 2019, and 2020 income statement of S Contraction, and assume revenue recognize over time according to percentage of completion.
Explanation of Solution
Recognized revenue
In the year 2018:
Given,
The contract price is $220,000,000
Actual cost to date is $4,000,000
Calculated total estimated cost is $160,000,000
Now, calculate the revenue recognition:
Hence, the calculated revenue recognition is $55,000,000.
In the year 2019:
Given,
The contract price is $220,000,000
Actual cost to date is $120,000,000
Calculated total estimated cost is $180,000,000
Now, calculate the revenue recognition:
Hence, the calculated revenue recognition is $91,670,000.
In the year 2020:
Given,
Contract price is $220,000,000
Calculated revenue recognition in 2018 is $55,000,000
Calculated revenue recognition in 2019 is $91,670,000
Now, calculate the revenue recognition:
Hence, the calculated revenue recognition is $73,330,000.
Recognized gross profit
In the year 2018:
Given,
Estimated gross profit in 2018 is $60,000,000 (1)
Total estimated cost is $160,000,000
Actual cost to date is $40,000,000
Now, calculate the gross profit recognition:
Hence, the calculated gross profit recognition is $15,000,000.
In the year 2019:
Here,
Estimated gross profit in 2019 is $40,000,000 (1)
Total estimated cost is $180,000,000
Gross profit recognition in 2018 is $15,000,000
Actual cost to date is $120,000,000
Now, calculate the gross profit recognition:
Hence, the calculated gross profit recognition is $11,670,000.
In the year 2020:
Here,
Estimated gross profit in 2018 is $50,000,000 (1)
Gross profit recognition in 2016 is $15,000,000
Gross profit recognition in 2017 is $11,670,000
Now, calculate the gross profit recognition:
Hence, the calculated gross profit recognition is $11,670,000.
Working note:
Calculate the value of gross profit (in millions)
| Particulars | 2018 | 2019 | 2020 | |||
| Contract price | $220 | $220 | $220 | |||
| Actual costs to date | $40 | $120 | $170 | |||
| Estimated costs to complete | $120 | $60 | $0 | |||
| Less: Total estimated cost | $160 | $180 | $170 | |||
| Estimated gross profit | $60 | $40 | $50 | |||
Table (1)
(1)
Requirement – 2
To calculate: The amount of revenue and gross profit or loss to be recognized in 2018, 2019 and 2020 assuming the project does not qualify for revenue recognition over time.
Explanation of Solution
Revenue recognition:
In this case, there is no revenue recognition because the project does not qualify for revenue recognition overtime.
Recognized gross profit:
In the year 2018 and 2019:
In this case, there is no recognized profit, because the contract is not yet completed. Hence, the gross profit in the year 2018 and 2019 is $0.
In the year 2020:
Here,
The contract price is $220,000,000
Actual cost to date is $170,000,000
Now, calculate the gross profit recognition:
Hence, the calculated gross profit recognition is $50,000,000.
Requirement – 3
The amount of revenue and gross profit or loss to be recognized in 2019, and assume S Construction recognizes revenue over time according to percentage of completion.
Explanation of Solution
Revenue recognition in the year 2019:
Here,
Contract price is $220,000,000
Actual cost to date is $120,000,000
Total estimated cost is $200,000,000
Revenue recognition is $55,000,000
Profit recognizes is $15,000,000.
Now, calculate the revenue recognition:
Hence, the calculated revenue recognition is $77,000,000.
Recognized gross profit in the year 2019:
Here,
Revenue recognition in 2019 is $77,000,000
Actual cost to date is $80,000,000
Now, calculate the gross profit recognition:
Hence, the calculated gross loss recognition is $300,000.
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Chapter 5 Solutions
Intermediate Accounting
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