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 ( ____________) ( ____________) ( ____________) ( ____________) ( ____________) ( ____________)
No situations listed.
You may need to type in the data.
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.
Costs Incurred During Year
Situation 2006 2007 2008
1 1,500 2,100 900
2 1,500 900 2,400
3 1,500 2,100 1,600
4 500 3,000 1,000
5 500 3,000 1,300
6 500 3,000 1,800
Estimated Costs to Complete
(As of the End of the Year)
Situation 2006 2007 2008
1 3,000 900 —
2 3,000 2,400 —
3 3,000 1,500 —
4 3,500 875 —
5 3,500 1,500 —
6 4,600 1,700 —
Gross Profit (Loss) Recognized
Percentage-of-Completion Completed Contract
Situation 2006 2007 2008
1
2
3
4
5
6
Completed Contract
Situation
2006 2007 2008
1
2
3
4
5
6
bhv
To solve this problem and complete the table, we need to understand the percentage-of-completion and completed contract methods for recognizing income or loss in construction projects.
The percentage-of-completion method recognizes income or loss based on the percentage of completion of the project. It takes into account the costs incurred and estimated costs to complete the project to determine the percentage of completion. The gross profit or loss recognized is calculated by applying the percentage of completion to the total contract price.
The completed contract method, on the other hand, recognizes income or loss only when the project is completed. No profit or loss is recognized during the construction process. The entire gross profit or loss is recognized in the year the project is completed.
Now, let's complete the table using the given information:
Situation 1:
For the percentage-of-completion method:
Percentage of completion in 2006 = Costs Incurred in 2006 / (Costs Incurred in 2006 + Estimated Costs to Complete in 2006) = $1,500 / ($1,500 + $3,000) = 0.33
Gross Profit (Loss) Recognized in 2006 = Total Contract Price * Percentage of Completion = $5,000,000 * 0.33 = $1,650,000
Similarly, calculate the percentages and gross profit (loss) recognized for 2007 and 2008 for the percentage-of-completion method.
For the completed contract method:
Since the project is completed in 2008, there is no gross profit or loss recognized in 2006 and 2007. In 2008, the entire gross profit or loss is recognized. Calculate it by subtracting the Total Costs Incurred from the Total Contract Price.
Complete the table for the remaining situations using the same calculations for both methods. Round all answers to the nearest whole dollar.