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JR Builders Construction Corporation contracted to construct a building for 400,000.

Construction began in 2015 and was completed in 2016. Data relating to the
contract are summarized below:

Year ended 2015 December 31, 2016


Costs incurred 200,000 110,000
Estimated costs to 100,000
complete

JR Builders uses the percentage of completion method as the basis for income
recognition.

For the years ended December 31, 2015, and 2016 respectively, JR Builders should
report recognized 2016 revenue of:

SOLUTION:

2015 2016
Contract price 400,000 400,000
Multiply by: percentage of completion (a) 66 2/3% 100%
Recognized revenue to date 266,667 400,000
Less: Recognized revenue in prior year - 266,667
Recognized revenue each year 266,667 133,333

(a)
Percentage of completion 2015 2016
Cost incurred each year 200,000 110,000
Add: Cost incurred in prior year - 200,000
Cost incurred to date 200,000 310,000
Add: Estimated costs of complete 100,000 -
Total estimated costs 300,000 310,000

Percentage of completion:
Costs incurred to date/ Total estimated costs 66 2/3% 100%
Imona Builders, Inc. employs the cost to cost method in determining the percentage of
completion for revenue recognition. The companys records show the following information on a
recently completed project for a contract price of 5,000,000.

2014 2015 2016


Costs incurred to date 900,000 2,550,000 ?
Gross profit (loss) 100,000 350,000 (50,000)

Complete the actual costs incurred during the year 2016.

Solution:

Estimated cost to complete the project at December 31, 2016:

Recognized gross profit in 2015 350,000


Add: Recognized gross profit in prior year - 2014 100,000
Recognized gross profit to date in 2015 (cumulative) 450,000
Add: Costs incurred to date in 2015 (cumulative) 2,550,000
Recognized revenue to date (cumulative) 3,000,000
Divided by: Contract Price 5,000,000
Percentage of completion 60%

Therefore, the traditional formula to compute the % of the completion would be as follows:
% of Completion = Cost Incurred to date 2015 divided by total estimated cost 2015
60 = 2,550,000/TEC TEC = 4,250,000

Total Estimated Costs - 2015 4,250,000


Less: Cost incurred to date - 2015 2,550,000
Costs incurred in 2015 1,700,000

(2)Cost incurred in 2016:

Contract price 5,000,000


Less: Total estimated gross profit (100,000 + 350,000 - 400,000
50,000)
Total estimated cost (or total actual cost) 4,600,000
Less: Cost incurred to date - 2015 (cumulative) 2,550,000
Cost incurred in 2015 2,050,000