Question

Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale.

2016 2017 2018
Costs incurred during the year $4,000,000 $9,500,000 $4,500,000
Estimated costs to complete as of year-end 12,000,000 4,500,000 -
Billings during the year 2,000,000 10,000,000 8,000,000
Cash collections during the year 1,800,000 8,600,000 9,600,000


During 2016, Citation began construction of an office building for Altamont Corporation. The total contract price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:student submitted image, transcription available below

Also during 2016, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2016 and paid for in full for $600,000 each by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred during 2016 for the nine uncompleted homes totaled $2,700,000.
Required:

1. Briefly explain the difference between recognizing revenue over time and upon project completion when accounting for long-term construction contracts.

2. Answer the following questions assuming that Citation concludes it does not qualify for revenue recognition over time for its office building contracts:

a. How much revenue related to this contract will Citation report in its 2016 and 2017 income statements? b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017?

c. What will Citation report in its December 31, 2016, balance sheet related to this contract? (Ignore cash.)

3. Answer requirements 2a through 2c assuming that Citation recognizes revenue over time according to percentage of completion for its office building contracts.

4. Assume the same information for 2016 and 2017, but that as of year-end 2017 the estimated cost to complete the office building is $9,000,000. Citation recognizes revenue over time according to percentage of completion for its office building contracts.

a. How much revenue related to this contract will Citation report in the 2017 income statement?

b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2017?

c. What will Citation report in its 2017 balance sheet related to this contract? (Ignore cash.)

5. When should Citation recognize revenue for the sale of its single-family homes?

6. What will Citation report in its 2016 income statement and 2016 balance sheet related to the single-family home business (ignore cash in the balance sheet)?

Answer 1

The question involves the comparison of revenue recognition methods for long-term construction contracts and the application of these methods to specific scenarios faced by Citation Builders, Inc. It includes calculating revenue, profits, and losses, as well as reporting for income statements and balance sheets.

Step-by-step explanation:

The question deals with the recognition of revenue for long-term construction contracts, specifically compared between the methods of recognizing revenue over time versus upon project completion, and applying these principles in the context of Citation Builders, Inc. It involves calculating the revenue, costs, and profits or losses associated with the contracts and determining what should be reported in the income statement and balance sheet.

Revenue Recognition Over Time vs. Upon Project Completion

The key distinction between recognizing revenue over time and upon project completion is that in the former, revenue is recognized as work is performed based on the progress towards completion, often using the percentage of completion method. In contrast, upon project completion, revenue is recognized only once the project is entirely completed, following the completed contract method.

Calculating Revenue and Gross Profit or Loss

Revenue and gross profit or loss are calculated based on the costs incurred, the total contract price, and the progress of the project. For instance, if revenue is recognized over time, the percentage of completion method is used, which compares the costs incurred to the estimated total costs to determine the proportion of the contract that is complete and the corresponding amount of revenue to be recognized. Conversely, if revenue is recognized upon project completion, no revenue is recognized until the project is fully completed.

Single-Family Homes Revenue Recognition

For the sale of single-family homes, Citation should recognize revenue upon the completion of the sale, which occurs when all the following criteria are met: the home is complete, the sale is finalized, the title has transferred, and the risks and rewards of ownership have been transferred to the buyer.