Question

On January 1, Year 1, a contractor began work on a $3.2 million construction contract that is expected to be completed in 3 years. The contractor concludes that it is appropriate to recognize revenue over time using the input method based on costs incurred (cost-to-cost method). At the inception date, the estimated cost of construction was $2.4 million. The following data relate to the actual and expected construction costs:

Year 1 Year 2 Year 3
Costs incurred $720,000 $1,170,000 $1,110,000
Expected future costs $1,680,000 $810,000 $0

For this long-term construction contract, the contractor needs to calculate the estimated dollar values of the revenue and gross profit (loss) to be recognized each year. Complete the contractor's long-term construction contract using the information above. Write the appropriate amounts in the associated cells. Indicate losses by using a leading minus (-) sign. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).

Revenue Gross profit (loss)
Year 1
Year 2

Answer 1

Revenue Costs Incurred Gross profit (loss)

Year 1 $768,000 $720,000 $48,000

Year 2 $1,248,000 $1,170,000 78,000

Year 3 $1,184,000 $1,110,000 74,000

Total $3,200,000 $3,000,000 $200,000

Step-by-step explanation:

a) Data and Calculations:

Construction contract = $3.2 million

Completion period = 3 years

Estimated cost of construction = $2.4 million

Construction costs:

Year 1 Year 2 Year 3 Total Costs

Costs incurred $720,000 $1,170,000 $1,110,000 $3 million

% of annual costs to total 24% 39% 37% 100%

Expected future costs $1,680,000 $810,000 $0

Annual Revenue $768,000 $1,248,000 $1,184,000 $3.2 million

Revenue Calculation:

Costs incurred/Total costs * $3,200,000

Revenue Costs Incurred Gross profit (loss)

Year 1 $768,000 $720,000 $48,000

Year 2 $1,248,000 $1,170,000 78,000

Year 3 $1,184,000 $1,110,000 74,000

Total $3,200,000 $3,000,000 $200,000

b) The revenue for each year is based on the costs incurred, as determined by the contractor.