Question

Ali Corporation uses the percentage – of – completion method to account for work performed under long –term construction contracts. Ailed began work under contract #7031-21, which provided for a contract price of $3,645,000. Additional data is as follows: 2020 2021 Cost incurred during the year……………………… $563,000 $1,764,000 Estimated costs to complete as of December 31, 1,500,000 - 0 – Required: What portion of the total contract price would be recognized as revenue in 2020 & in 2021? Following information was taken from the records of Brenner Corporation for the year indicated. The company’s year-end is December 31, 2020 2021 2022 Sales (on installment)…………………….. $450,000 $500,000 $620,000 Cost of sales……………………………… 342,000 360,000 434,000 Gross profit ……………………… $108,000 140,000 186,000 Cash receipts: 2020 Sales $125,000 $280,000 $ 45,000 2021 Sales $210,000 230,000 2022 Sales 250,000 Calculate the amount of Realized Gross profit on installment sales and Deferred Gross Profit to be reported in the year – end – financial statement of Brenner Corporation for the year noted.​

Answer 1

To find the portion of the total contract price that would be recognized as revenue in 2020 and 2021 for Ali Corporation, we can use the percentage-of-completion method. This method calculates revenue based on the proportion of the contract that has been completed.

2020:

The proportion of the contract completed in 2020 is the cost incurred during the year divided by the total estimated cost to complete the contract as of December 31, 2020.

$563,000 / $1,500,000 = 0.375

So, the portion of the total contract price that would be recognized as revenue in 2020 is 0.375 * $3,645,000 = $1,359,375.

2021:

The proportion of the contract completed in 2021 is the cost incurred during the year divided by the total estimated cost to complete the contract as of December 31, 2021. Since the contract is completed so there is no remaining costs to complete so the proportion of completion is 1.

$1,764,000 / $1,764,000 = 1

So, the portion of the total contract price that would be recognized as revenue in 2021 is 1 * $3,645,000 = $3,645,000.

For Brenner Corporation:

Realized Gross profit on installment sales:

This is the gross profit from sales that have been fully paid for in cash.

2020: $125,000 + $280,000 + $45,000 = $450,000

2021: $210,000 + $230,000 = $440,000

2022: $250,000

So, the realized gross profit on installment sales is $450,000 + $440,000 + $250,000 = $1,140,000

Deferred Gross Profit:

This is the gross profit from sales that have not been fully paid for in cash and is recognized when the cash is received.

2020: $108,000

2021: $140,000

2022: $186,000

So, the deferred gross profit is $108,000 + $140,000 + $186,000 = $434,000

Answer 2

In 2020, Ali Corporation would recognize approximately $994,478 of the total contract price as revenue under the percentage-of-completion method. By the end of 2021, since the project is completed, the corporation would recognize the remaining balance, resulting in the full contract price of $3,645,000 being recognized. Additionally, a firm’s accounting profit can be determined by subtracting explicit costs from the total revenue.

Step-by-step explanation:

Under the percentage-of-completion method, Ali Corporation should recognize revenue based on the progress of the construction project. For contract #7031-21, the revenue recognized each year would be a proportion of the total contract price equivalent to the ratio of costs incurred to the estimated total costs.

Revenue Recognition in 2020:

Costs incurred in 2020: $563,000.
Estimated total costs (2020): $563,000 + $1,500,000 = $2,063,000.
Percentage of completion: $563,000 / $2,063,000 ≈ 27.29%.
Revenue to be recognized in 2020: 27.29% of $3,645,000 ≈ $994,478.

Revenue Recognition in 2021:

Total costs incurred by the end of 2021: $563,000 + $1,764,000 = $2,327,000.
Total estimated costs were also $2,327,000 since the project was completed in 2021.
Percentage of completion: 100% (as the project is completed).
Revenue to be recognized in 2021: 100% of $3,645,000 = $3,645,000.
Revenue already recognized in 2020: $994,478.
Additional revenue to be recognized in 2021: $3,645,000 - $994,478 = $2,650,522.

The firm's accounting profit and realized gross profit on installment sales can be calculated by subtracting explicit costs from the sales revenue. For example, if a firm had sales revenue of $1 million last year and spent $600,000 on labor, $150,000 on capital, and $200,000 on materials, it would have an accounting profit of $50,000.