Question

Seasons Construction is constructing an office building under contract for Cannon Company and uses the percentage-of-completion method. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. 18). Seasons Construction completes the remaining 25% of the building construction on December 31, 2020, as scheduled. At that time the total costs of construction are $18,750,000.

What is the total amount of Revenue from Long-Term Contracts and Construction Expenses that Seasons will recognize for the year ended December 31, 2020?


Revenue Expenses

(A) $18,600,000 $18,750,000

(B) $4,650,000 $ 4,687,500

(C) $4,650,000 $ 5,250,000

(D) $4,687,500 $ 4,687,500

Answer 1

The total revenue recognized by Seasons Construction for the year ended December 31, 2020, is $4,650,000, while the construction expenses recognized are $18,750,000.

Step-by-step explanation:

Revenue from long-term contracts can be recognized using the percentage-of-completion method. This method recognizes revenue based on the percentage of completion of a contract. In this scenario, Seasons Construction is using the percentage-of-completion method, so their total revenue recognized will be a percentage of the total contract price.

To calculate the revenue, we need to determine the percentage of completion of the construction. Seasons estimates that they will complete 25% of the building construction by December 31, 2020. Since the total contract price is $18,600,000, the revenue recognized for the year ended December 31, 2020, would be 25% of $18,600,000, which is $4,650,000 (option B).

Construction expenses would include all costs incurred during the construction process. Given that the total costs of construction are $18,750,000, the construction expenses recognized for the year ended December 31, 2020, would be $18,750,000 (option A).