Income (loss) recognition; Long-term contract; revenue recognition over time vs. upon project completion
• LO5–9
Brady Construction Company contracted to build an apartment complex for a price of $5,000,000. Construction began in 2018 and was completed in 2020. The following is a series of independent situations, numbered 1 through 6, involving differing costs for the project. All costs are stated in thousands of dollars.
Required:
Copy and complete the following table:

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.
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 as 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.
To determine: The amount of gross profit or loss to be recognized under various situations.
Answer to Problem 5.21E
The amount of gross profit or loss to be recognized under various situations is as follows:
(Figure 1)
Explanation of Solution
Working note:
Situation – 1
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 1,500,000 | 3,600,000 | 4,500,000 |
Estimated costs to complete | 3,000,000 | 900,000 | 0 |
Total estimated costs (B) | 4,500,000 | 4,500,000 | 4,500,000 |
Estimated gross profit(actual in 2020)
|
$500,000 | $500,000 | $500,000 |
Table (1)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | 0 |
2019 | 0 |
2020 | $500,000 |
Total gross profit | $500,000 |
Table (2)
(4)
Situation – 2
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 1,500,000 | 2,400,000 | 4,800,000 |
Estimated costs to complete | 3,000,000 | 2,400,000 | 0 |
Total estimated costs (B) | 4,500,000 | 4,800,000 | 4,800,000 |
Estimated gross profit(actual in 2020)
|
$500,000 | $200,000 | $200,000 |
Table (3)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | 0 |
2019 | 0 |
2020 | $200,000 |
Total gross profit | $200,000 |
Table (4)
(8)
Situation – 3
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 1,500,000 | 3,600,000 | 5,200,000 |
Estimated costs to complete | 3,000,000 | 1,500,000 | 0 |
Total estimated costs (B) | 4,500,000 | 5,100,000 | 5,200,000 |
Estimated gross profit(actual in 2020)
|
$500,000 | $(100,000) | $(200,000) |
Table (5)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | 0 |
2019 | $(100,000) |
2020 | $(100,000) |
Total gross profit | $(200,000) |
Table (6)
(12)
Situation – 4
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 500,000 | 3,500,000 | 4,500,000 |
Estimated costs to complete | 3,500,000 | 875,000 | 0 |
Total estimated costs (B) | 4,000,000 | 4,375,000 | 4,500,000 |
Estimated gross profit(actual in 2020)
|
$1,000,000 | $625,000 | $500,000 |
Table (7)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | 0 |
2019 | 0 |
2020 | $500,000 |
Total gross profit | $500,000 |
Table (8)
(16)
Situation – 5
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 500,000 | 3,500,000 | 4,800,000 |
Estimated costs to complete | 3,500,000 | 1,500,000 | 0 |
Total estimated costs (B) | 4,000,000 | 5,000,000 | 4,800,000 |
Estimated gross profit(actual in 2020)
|
$1,000,000 | $0 | $200,000 |
Table (9)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | 0 |
2019 | 0 |
2020 | $200,000 |
Total gross profit | $200,000 |
Table (10)
(20)
Situation – 6
1. Compute the value of gross profit or loss recognized over time
Here,
Particulars | 2018 | 2019 | 2020 |
Contract price (A) | $5,000,000 | $5,000,000 | $5,000,000 |
Actual costs to date | 500,000 | 3,500,000 | 5,300,000 |
Estimated costs to complete | 4,600,000 | 1,700,000 | 0 |
Total estimated costs (B) | 5,100,000 | 5,200,000 | 5,300,000 |
Estimated gross profit(actual in 2020)
|
$(100,000) | $(200,000) | $(300,000) |
Table (11)
In the year 2018:
In the year 2019:
In the year 2020:
2. Compute the value of gross profit or loss recognized upon completion
Year | Gross profit recognized |
2018 | $(100,000) |
2019 | (100,000) |
2020 | (100,000) |
Total gross profit | $(300,000) |
Table (12)
(24)
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