Destiny Apartments Inc. (DA Inc.) is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. DA Inc. uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year: Year 1 Year 2 Year 3 Costs incurred each year 9,000 31,500 20,000 Estimated costs to complete 51,000 27,000 0 Billings 13,000 29,500 25,500 Collections 9,000 26,500 32,500 Required: a. Explain how the percentage completion method reduced information asymmetry and guards against moral hazard. b. Compute the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below: Year 1 Year 2 Year3 Cost incurred to date Estimated cost to complete Estimated total cost Contract price Estimated gross profit % complete Gross profit to date Gross profit previously recognized Current gross profit c. Complete the PARTIAL Balance Sheet for Year 2 Current assets Accounts Receivable Inventories Current Liabilities Unearned revenue
Destiny Apartments Inc. (DA Inc.) is building a luxury condominium for a contract price of $68,000,000. This is estimated to be a three-year project with an estimated cost of $54,000,000. DA Inc. uses the percentage of completion method of revenue recognition, using the cost-to-cost method of estimating the percentage complete. The following is the best available information at the end of each year:
|
|
Year 1 |
Year 2 |
Year 3 |
|
Costs incurred each year |
9,000 |
31,500 |
20,000 |
|
Estimated costs to complete |
51,000 |
27,000 |
0 |
|
Billings |
13,000 |
29,500 |
25,500 |
|
Collections |
9,000 |
26,500 |
32,500 |
Required:
a. Explain how the percentage completion method reduced information asymmetry and guards against moral hazard.
b. Compute the amount of gross profit to be recognized in Year 1, Year 2, and Year 3. Show computations in tabular form provided below:
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|
Year 1 |
Year 2 |
Year3 |
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Cost incurred to date |
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Estimated cost to complete |
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Estimated total cost |
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Contract price |
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Estimated gross profit |
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% complete |
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Gross profit to date |
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Gross profit previously recognized |
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Current gross profit |
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c. Complete the PARTIAL
Current assets
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Inventories |
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Current Liabilities
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Unearned revenue |
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