Question

Question: P18-9 (LO5,6) EXCEL (Recognition of Profit on Long-Term Contract) Shanahan 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 \(600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at \)900,000. The following data pertain to the construction period.

	2017	2018	2019
Cost to date	\(270,000	\)450,000	$610,000
Estimated cost to Complete	330,000	150,000	-
Progress billing to date	270,000	550,000	900,000
Cash collected to date	240,000	500,000	900,000

Instructions

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

Short answer

Answer

Gross profit for each year:

2017:$135,000

2018:$90,000

2019:$65,000

Step-by-step solution

Definition of Percentage of Completion Method

The method of recognizing the revenue and gross profit for a contract is the percentage of the complete method. This method calculates the percentage of work completed based on the cost incurred to recognize the revenue and profit.

Calculation of gross profit under the percentage of completion method

	2017	2018	2019
Contract price	$900,000	$900,000	$900,000
Less:
Estimated total cost	($600,000)	($600,000)	($610,000)
Estimated total gross profit	$300,000	$300,000	$290,000

Gross profit Recognized:

Particular	2017	2018	2019
Gross profit for each year	$135,000	$225,000	$290,000
Less: Profit recognized in the previous year	($0)	($135,000)	($225,000)
Gross profit	$135,000	$90,000	$65,000

Working note:

Calculation of estimated total cost:

	2017	2018	2019
Cost to date	$270,000	$450,000	$610,000
Add: Estimated cost to complete	330,000	150,000	0
Estimated total cost	$600,000	$600,000	$610,000

The formula for calculating gross profit:

$\text{Grossprofit=}\left(\frac{\cos \text{ttodate}}{estimated\cos t}\text{×Estimatedgrossprofit}\right)\text{-Grossprofitrecognizedinpreviousyear}$