Construction Revenue Recognition

Question

In 2020, Acme Construction began work on a contract with a price of $850,000 and estimated costs of $595,000. Data for each year of the contract are as follows:

2020 2021 2022

Costs incurred during the year $238,000$319,600 $105,000

Estimated costs to complete 357,000 139,400 -0-

Partial billings 260,000 210,000 380,000

Collections 240,000 200,000 410,000

Under the percentage-of-completion method of revenue recognition, gross profit in 2020 would be

a. $102,000 <-------I know this one is correct

b. $260,000

c. $255,000

d. $425,000

Under the percentage-of-completion method of revenue recognition, the balance in Construction in Progress at the end of 2020 would be

a. $238,000

b. $340,000

c. $498,000

d. $578,000

Under the completed contract method of revenue recognition, the balance in Construction in Progress at the end of 2020 would be

a. $238,000.

b. $340,000

c. $498,000

d. $578,000

Answer 1

Percentage of Completion Method

The first step is to determine how much of the project is complete in 2020. To do this, divide costs incurred that year by the total estimated cost of the project. In 2020, the percent complete is 40% (238,000/595,000). The easy way to get the balance for Construction In Progress is to multiply the contract sale price 850,000 by the 40% completed. So $340,000 is the revenue reported that year. That revenue is also the ending balance for Construction In Progress.

Completed Contract Method only recognizes revenue at the end, so the Construction In Progress is the $238,000 costs incurred in the first year.