On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $250 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $250 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):

	2016			2017			2018
Costs incurred during the year	$	80		$	40		$	30
Estimated costs to complete as of December 31		120			30			—

Required:
1.	Compute the revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion.

Compute the amount of revenue and gross profit or loss to be recognized in 2016, 2017, and 2018 using the completed contract method.

 

Suppose the estimated costs to complete at the end of 2017 are $120 million instead of $30 million. Compute the amount of revenue and gross profit or loss to be recognized in 2017 using the percentage of completion method.

 

Explanation

1.

($ in millions)	2016			2017			2018
Contract price	$	250		$	250		$	250
Actual costs to date		80			120			150
Estimated costs to complete		120			30			- 0 -
Total estimated costs		200			150			150
Estimated gross profit (loss) (actual in 2018)	$	50		$	100		$	100

Gross profit (loss) recognition:

2016:	$80	= 40% × $50 = $20.00
	$200

2017:	$120	= 80.00% × $100 = $80.00 – $20.00 = $60.00
	$150

2018: $250 – 150 = $100 – ($20.00 + 60.0) = $20.00

Revenue recognition:

2016:	$80	= 40% × $250 = $100.00
	$200

  

2017:	$120	= 80.00% × $250 = $200.00 – $100.00 = $100.00
	$150

2018: $250 – ($100.00 + $100.00) = $50.00

3.

Revenue recognition:

2017:	$120	= (50% × $250) – $100 = $25.00
	$240

Gross profit (loss) recognition:

2017:	$120	= 50% × $10* = $5.00 – 20 = $(15.00) loss
	$240

*$250 – ($80 + 40 + 120) = $10

Thank you!