Question

On January 1, Year 1, Cumulus Contracting, Inc., entered into an agreement to construct a building on the customer's land. The project was expected to take 3 years and involve a total cost of $6,000,000. The client has agreed to pay Cumulus $9,000,000 upon completion of the building. Cumulus determined that revenue from this contract is recognized over time. Cumulus uses the input method based on costs incurred to measure progress toward completion of the contract.

The following information about the costs of the project are taken from the accounting records of Cumulus.

Year 1 Year 2 Year 3
Costs incurred during year $1,000,000 $3,000,000 $4,000,000
Expected future costs $5,000,000 $4,000,000 $0

Required:
Write the appropriate amounts.

Answer 1

% completion method Year 1 Year 2 Year 3

Cost incurred in till previous year 0 1000000 4000000

Add Cost incurred during the year 1000000 3000000 4000000

Total cost incurred till date 1000000 4000000 8000000

Add: Estimated cost to be incurred 5000000 4000000 0

Total estimated cost to be incurred 6000000 8000000 8000000

Percentage of completion (A) 17% 50.00% 100%

Note: Percentage of completion = (Cost incurred till date / Total estimated cost)

Total revenue (B) 9000000 9000000 9000000

Total revenue recognized(A*B) 1500000 4500000 9000000

- Revenue recognized in previous year 0 1500000 4500000

Revenue recognized in current year 1500000 3000000 4500000

Year 1 Year 2 Year 3

Revenue 1500000 3000000 4500000

Less: Cost incurred 1000000 3000000 4000000

Gross profit 500000 0 500000