Chapter 5, Problem 5.13P

1

To determine

Contract:

Contract is a written document that creates legal agreement between the parties for buying and selling the property. It is committed by the parties to perform their obligation and to enforce their rights.

Revenue recognized point of long term contract:

A long-term contract qualifies for revenue recognition over time. The seller can recognize the revenue as per percentage of the completion of the project, which is recognized by revenue minus cost of completion until date.

If a contract does not meet the performance obligation norm, then the seller cannot recognize the revenue till the project is complete.

The revenue recognition principle

The revenue recognition principle refers to the revenue that should be recognized in the time period, when the performance obligation (sales or services) of the company is completed.

To discuss:  The difference between recognizing revenue over time and upon project completion when accounting for long-term construction contract ends.

Explanation of Solution

In recognizing revenue over time, the revenue is recognized when delivery occurs for a contract.

In recognizing revenue upon project completion, the revenue is recognized based on time requires to complete the project, and revenue of each period should be calculated based on the percentage of completion.

2 a)

To determine

The amount of revenue related to the contract C Builders report in 2016 and 2017 income statement (Assume revenue recognized over the time).

Explanation of Solution

The amount of revenue recognized for overtime period concept is $0, because the revenue is recognized based on project completion. Hence, C Builders would not report revenue in the year 2016 or 2017 income statement.

2 b)

To determine

The amount of gross profit or loss related to the contract C Builders during the year 2016 and 2017(Assume revenue recognized over the time).

Explanation of Solution

The amount of gross profit recognized for overtime period concept is $0, because the revenue is recognized based on project completion. Hence, C Builders would not report any gross profit in the year 2016 or 2017 income statement.

2 c)

To determine

To report: The balance sheet of C Builders in December 31, 2016.

Explanation of Solution

Balance sheet At December 31,2016
Current assets	Amount
Accounts receivable	$200,000
Cost and profit in excess of billings	$2,000,000

Table (1)

Working note:

Calculate the value of estimated gross profit

Particulars	2016		2017
Contract price		20,000,000		20,000,000
Actual costs to date	4,000,000		13,500,000
Estimated costs to complete	12,000,000		4,500,000
Less: Total estimated cost		16,000,000		18,000,0000
Estimated gross profit		4,000,000		2,000,000

Table (2)

(1)

3 a)

To determine

The amount of revenue related to the contract C Builders report in 2016 and 2017 income statement (Assume revenue recognized percentage of completion).

Explanation of Solution

In the year 2016:

Given,

The contract price is $20,000,000

Actual cost to date is $4,000,000

Calculated total estimated cost is $16,000,000

Now, calculate the revenue recognition:

$\begin{array}{c}\text{Revenue recognition =Contract price}\times \left(\frac{\text{Actual cost to date}}{\text{Total estimated cost}}\right)\\ \text{=}\$\text{20},000,000\times \frac{\$4,000,000}{\$16,000,000}\\ =\$20,000,000\times 25\%\\ =\$5,000,000\end{array}$

Hence, the calculated revenue recognition is $5,000,000.

In the year 2017:

Given,

The contract price is $20,000,000

Actual cost to date is $13,500,000

Calculated total estimated cost is $18,000,000

Now, calculate the revenue recognition:

$\begin{array}{c}\text{Revenue recognition =}\left[\begin{array}{l}\left[\text{Contract price}\times \left(\frac{\text{Actual cost to date}}{\text{Total estimated cost}}\right)\right]-\\ \text{Previous year revenue}\end{array}\right]\\ \text{=}\left(\$\text{20},000,000\times \frac{\$13,500,000}{\$18,000,000}\right)-\$5,000,000\\ =\left(\$20,000,000\times 75\%\right)-\$5,000,000\\ =\$10,000,000\end{array}$

Hence, the calculated revenue recognition is $10,000,000.

3 b)

To determine

The amount of gross profit or loss related to the contract C Builders during the year 2016 and 2017(Assume revenue recognized over the time).

Explanation of Solution

In the year 2016:

Here,

Revenue recognition in 2016 is $5,000,000

Actual cost to date is $4,000,000.

Now, calculate the gross profit recognition:

$\begin{array}{c}\text{Gross profit recognition =}\left(\begin{array}{l}\text{Revenue recognition in 2}0\text{18}\\ -\text{ Actual cost to date}\end{array}\right)\\ \text{=}\$5,000,000-\$4,000,000\\ =\$1,000,000\end{array}$

Hence, the calculated gross profit recognition is $1,000,000.

In the year 2017:

Here,

Revenue recognition in 2017 is $10,000,000

Gross profit recognition is $9,500,000

Now, calculate the gross profit recognition:

$\begin{array}{c}\text{Gross profit recognition =}\left(\begin{array}{l}\text{Revenue recognition in 2}0\text{19}\\ -\text{ Gross profit recognition }\end{array}\right)\\ =\$10,000,000-\$9,500,000\\ =\$500,000\end{array}$

Hence, the calculated gross loss recognition is $500,000.

3 c)

To determine

To report: The balance sheet of C Builders in December 31, 2016.

Explanation of Solution

Balance sheet At December 31,2016
Current assets	Amount
Accounts receivable	$200,000
Cost and profit in excess of billings  (2)	$2,000,000

Table (3)

Working note:

Calculate the cost and profit in excess of billings

Given,

Cost is $400,000

Billing profit is $100,000

$\begin{array}{c}\text{Costs and profit in excess of billings =}\left(\text{Costs }-\text{Billing loss}\right)\\ \text{=}\$\text{4,0}00,000-\$2,000,000\\ =\$2,000,000\end{array}$ (2)

4 a)

To determine

The amount of revenue related to the contract C Builders report in 2017 income statement (Assume revenue recognized percentage of completion).

Explanation of Solution

In the year 2017:

Given,

Contract price is $12,000,000 (3)

Revenue recognized in prior period is $5,000,000

Now, calculate the revenue recognition:

$\begin{array}{c}\text{Revenue recognition =Contractprice}-\left(\text{Revenue recognized in prior period}\right)\\ =\$12,000,000-\left(\$5,000,000\right)\\ =\$7,000,000\end{array}$

Hence, the calculated revenue recognition is $7,000,000.

Working note:

Calculate the total revenue recognized to date:

Given,

The contract price is $20,000,000

Actual cost to date is $13,500,000

Calculated total estimated cost is $22,500,000

Now, calculate the revenue recognition:

$\begin{array}{c}\text{Revenue recognition =Contract price}\times \left(\frac{\text{Actual cost to date}}{\text{Total estimated cost}}\right)\\ \text{=}\$\text{20},000,000\times \frac{\$13,500,000}{\$22,500,000}\\ =\$20,000,000\times 60\%\\ =\$12,000,000\end{array}$ (3)

4 b)

To determine

The amount of gross profit or loss related to the contract C Builders during the year 2017(Assume revenue recognized over the time).

Explanation of Solution

In the year 2017:

Here,

 Overall loss is ($2,500,000)

 Previously recognized gross profit is $1,000,000

Now, calculate the gross profit recognition:

$\begin{array}{c}\text{Gross profit recognition =}\left(\begin{array}{l}\text{Overall loss}-\\ \text{Previously recognized gorss profit }\end{array}\right)\\ =(\$2,500,000)-\$1,000,000\\ =\$3,500,000\end{array}$

Hence, the calculated gross loss recognition is $3,500,000.

4 c)

To determine

To report: The balance sheet of C Builders in December 31, 2017.

Explanation of Solution

Balance sheet At December 31,2017
Current assets	Amount
Accounts receivable	$1,600,000
Cost and profit in excess of billings  (4)	$1,000,000

Table (4)

Working note:

Calculate the cost and profit in excess of billings

Given,

Profit is $12,000,000

Billing profit is $11,000,000

$\begin{array}{c}\text{Costs and profit in excess of billings =}\left(\begin{array}{l}\text{Profit }\\ \text{- Billing profit}\end{array}\right)\\ \text{=}\$12,000,000-\$11,00,000\\ =\$1,000,000\end{array}$ (4)

Requirement – 5

To determine

To discuss: The point of revenue recognized from sale of single-family homes

Explanation of Solution

C Builders should recognize the revenue when the homes are completed and delivery to the customer. Recognizing revenue over time is not appropriate in this case, because the customer did not get any benefit when the seller is performed (at the time of construction). Hence, the performance of obligation is completed when seller is complete the single-family home contraction wholly.

Therefore, the point of revenue recognized when the delivery of single-family home to customer.

Requirement – 6

To determine

To prepare: The income statement and balance sheet of C Builders at the year ended 2016.

Explanation of Solution

Solution:

The income statement and balance sheet of C Builders at the year ended 2016 are as follows:

Income statement:

Income statement of C Builders
At the year ended December, 2016
Particulars	$
Sales revenue  $\left(3\times \$600,000\right)$	1,800,000
Less: Cost of goods sold $\left(3\times \$450,000\right)$	1,350,000
Gross profit	450,000

Table (5)

Balance sheet:

Balance sheet of C Builders
At the year ended December, 2016
Assets	$
Current assets	2,700,000
Inventory work in process
Current liabilities
Customer deposits  (5)	300,000

Table (6)

Working note:

Calculate the value of customer deposits:

$\begin{array}{c}\text{Customer deposits = }\left(\text{Cost}\times \text{10\%}\right)\times \text{Number of home}\\ \text{=}\left(\$600,000\times \frac{10}{100}\right)\times 5\\ =\$300,000\end{array}$ (5)

Conclusion

Hence, the income statement and balance sheet of C Builders are prepared.