Question

In 2021, the Westgate Construction Company entered into a contract to construct a road for Santa Clara County for $10,000,000. The road was completed in 2023. Information related to the contract is as follows: 2021 2022 2023 Cost incurred during the year $ 2,400,000 $ 3,600,000 $ 2,200,000 Estimated costs to complete as of year-end 5,600,000 2,000,000 –0– Billings during the year 2,000,000 4,000,000 4,000,000 Cash collections during the year 1,800,000 3,600,000 4,600,000 Westgate recognizes revenue over time according to percentage of completion. Required:

1. Calculate the amount of revenue and gross profit to be recognized in each of the three years

Answer 1

Revenue and gross profit are recognized over the duration of the project using the percentage of completion method, calculated based on the costs incurred compared to the total estimated costs. For each year, you calculate the percentage complete, determine revenue recognized to that point, and subtract prior years' revenue to find the current year's revenue and gross profit.

Step-by-step explanation:

The Westgate Construction Company needs to recognize revenue and gross profit for a construction contract over three years using the percentage of completion method. This method proportionally recognizes revenue and gross profit based on the costs incurred relative to the total estimated costs of the project. Here's how you calculate it for each year:

• Total costs incurred to date: Sum of costs incurred during the year.
• Total estimated costs: Original contract value.
• Percentage of completion: Total costs incurred to date divided by total estimated costs.
• Revenue recognized to date: Percentage of completion multiplied by the total contract value.
• Revenue recognized during the year: Revenue recognized to date minus revenue recognized in prior years.
• Gross profit: Revenue recognized during the year minus costs incurred during the year.

Calculations:

1. 2021: $2,400,000 costs / $10,000,000 total contract = 24% complete. Revenue = 24% x $10,000,000 = $2,400,000. Gross profit = $2,400,000 - $2,400,000 = $0.
2. 2022: ($2,400,000 + $3,600,000) costs / $10,000,000 total contract = 60% complete. Revenue to date = 60% x $10,000,000 = $6,000,000. Revenue for 2022 = $6,000,000 - $2,400,000 = $3,600,000. Gross profit = $3,600,000 - $3,600,000 = $0.
3. 2023: ($2,400,000 + $3,600,000 + $2,200,000) costs / $10,000,000 total contract = 100% complete. Revenue to date = 100% x $10,000,000 = $10,000,000. Revenue for 2023 = $10,000,000 - $6,000,000 = $4,000,000. Gross profit = $4,000,000 - $2,200,000 = $1,800,000.