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 $ 2,079,000 $ 3,465,000 $ 2,371,600
Estimated costs to complete as of year-end 5,621,000 2,156,000 0
Billings during the year 1,700,000 3,844,000 4,456,000
Cash collections during the year 1,500,000 3,300,000 5,200,000


Assume that Westgate Construction’s contract with Santa Clara County does not qualify for revenue recognition over time.

Required:
1. Calculate the amount of revenue and gross profit (loss) to be recognized in each of the three years.

Answer 1

To calculate the revenue and gross profit (loss) to be recognized in each of the three years, subtract the cost incurred during the year from the billings during the year. The gross profit (loss) is obtained by subtracting the cost incurred during the year from the revenue recognized.

Step-by-step explanation:

To calculate the revenue and gross profit (loss) to be recognized in each of the three years, we need to subtract the cost incurred during the year from the billings during the year. This will give us the amount of revenue recognized. The gross profit (loss) can be calculated by subtracting the cost incurred during the year from the revenue recognized.

For 2021, the revenue recognized would be $1,700,000 ($1,700,000 - $2,079,000 = -$379,000 loss), for 2022 it would be $0 ($3,844,000 - $3,465,000 = $379,000 profit), and for 2023 it would be $4,456,000 ($5,200,000 - $2,371,600 = $2,828,400 profit).