Question

E18-37 (LO5,6) (Recognition of Profit and Balance Sheet Amounts for Long-Term Contracts) Yanmei Construction Company began operations on January 1, 2017. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of $4,500,000.Thetotalcontractpriceforconstructionofthefacilityis$6,000,000. During the year, Yanmei incurred $1,185,800inconstructioncostsrelatedtotheconstructionproject.Theestimatedcosttocompletethecontractis$4,204,200. Lundquist Corp. was billed and paid 25% of the contract price.

Instructions

Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2017, and the amount to be shown as “costs and recognized profit in excess of billings” or “billings in excess of costs and recognized profit” at December 31, 2017, under each of the following methods. Show supporting computations in good form.

(a) Completed-contract method.

(b) Percentage-of-completion method.

Short answer

(a) Complete-contract method:

Gross Profit:$0.

Billing in excess of cost:$314,200.

(b) Percentage-of-completion method:

Gross profit:$134,200

Estimated profit:$610,000

Step-by-step solution

Definition of Complete Contract Method

The method accounts for a contract under which the gross profit, revenue, and expenses are not recognized in the books until when the contract is completed.

Calculation of Gross Profit under Completed-contract method

The companies will not recognize the Gross profit under the complete contract method till the date of completion of the contract.

Calculation of billing in excess of cost and recognized profit:

Particular	Amount $
Construction cost incurred in year 2017	$1,185,800
Less: Billing made during the year	($1,500,000)
Billing in excess of cost	$314,200

Calculation of Gross Profit under percentage-of-completion method

Particular	Amount $
Contract price	$6,000,000
Less: Cost to date	($1,185,800)
Less: Estimated cost to complete	($4,204,200)
Estimated Profit	$610,000

Calculation of gross profit

$\begin{array}{c}\mathbf{G}\mathbf{r}\mathbf{o}\mathbf{s}\mathbf{s}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{=}\mathbf{E}\mathbf{s}\mathbf{t}\mathbf{i}\mathbf{m}\mathbf{a}\mathbf{t}\mathbf{e}\mathbf{d}\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{\times }\frac{\mathbf{C}\mathbf{o}\mathbf{s}\mathbf{t}\mathbf{t}\mathbf{o}\mathbf{d}\mathbf{a}\mathbf{t}\mathbf{e}}{\mathbf{T}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{c}\mathbf{o}\mathbf{s}\mathbf{t}}\\ \mathbf{=}\mathbf{\$}\mathbf{610}\mathbf{,}\mathbf{000}\mathbf{\times }\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{185}\mathbf{,}\mathbf{800}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{185}\mathbf{,}\mathbf{800}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{204}\mathbf{,}\mathbf{200}}\\ \mathbf{=}\mathbf{\$}\mathbf{134}\mathbf{,}\mathbf{200}\end{array}$