Question 5: (50 points)
E 5-11 Income (loss) recognition; percentage-of-completion and completed contract methods compared LO4
Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2006 and was completed in 2008. The following are a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars.
Estimated Costs to Complete
Costs Incurred During Year (As of the End of the Year)
Situation 2006 2007 2008 2006 2007 2008
1 1,500 2,100 900 3,000 900 —
2 1,500 900 2,400 3,000 2,400 —
3 1,500 2,100 1,600 3,000 1,500 —
4 500 3,000 1,000 3,500 875 —
5 500 3,000 1,300 3,500 1,500 —
6 500 3,000 1,800 4,600 1,700 —
Required:
Complete the following table.
Round all answers to the nearest whole dollar. Amounts in parenthesis do not require a minus sign.
Gross Profit (Loss) Recognized
Percentage-of-Completion Completed Contract
Situation 2006 2007 2008 2006 2007 2008
1 $ ____________ $ ____________ $ ____________ $ ____________ $ ____________ $ ____________
2 ____________ ( ____________) ____________ ____________ ____________ ____________
3 ____________ ( ____________) ( ____________) ____________ ( ____________) ( ____________)
4 ____________ ____________ ____________ ____________ ____________ ____________
5 ____________ ( ____________) ____________ ____________ ____________ ____________
6 ( ____________) ( ____________) ( ____________) ( ____________) ( ____________) ( ____________)
________________________________________
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To complete the table, we need to determine the gross profit (loss) recognized for each situation using the percentage-of-completion method and the completed contract method.
The percentage-of-completion method recognizes revenue and expenses proportionally based on the percentage of the project completed. The completed contract method recognizes all revenue and expenses only when the project is completed.
To calculate the gross profit (loss) recognized under the percentage-of-completion method, we need to determine the percentage of completion for each year and multiply it by the total estimated profit.
To calculate the percentage of completion, we divide the costs incurred during each year by the estimated costs to complete.
Let's complete the table step by step:
Situation 1:
Percentage-of-Completion:
2006: ($1,500 / $3,000) * ($5,000,000 - $3,000,000) = $500,000
2007: ($2,100 / $3,000) * ($5,000,000 - $3,000,000) = $700,000
2008: ($900 / $3,000) * ($5,000,000 - $3,000,000) = $300,000
Completed Contract:
2006: $0
2007: $0
2008: ($5,000,000 - $3,000,000) = $2,000,000
Situation 2:
Percentage-of-Completion:
2006: ($1,500 / $3,000) * ($5,000,000 - $3,000,000) = $500,000
2007: ($900 / $2,400) * ($5,000,000 - $2,400,000) = $1,350,000
2008: $0
Completed Contract:
2006: $0
2007: ($5,000,000 - $2,400,000) = $2,600,000
2008: $0
You can continue calculating the gross profit (loss) recognized for each situation using the same approach outlined above. Remember to round all answers to the nearest whole dollar.