Question

Yanmei Construction Company began operations on January 1, 2020. During the year, Yanmei Construction entered into a contract with Lundquist Corp. to construct a manufacturing facility. At that time, Yanmei estimated that it would take 5 years to complete the facility at a total cost of $4,500,000. The total contract price for construction of the facility is $6,000,000. During the year, Yanmei incurred $1,185,800 in construction costs related to the construction project. The estimated cost to complete the contract is $4,204,200. Lundquist Corp. was billed and paid 25% of the contract price.

Instructions:
Prepare schedules to compute the amount of gross profit to be recognized for the year ended December 31, 2020, and the amount to be shown as "costs and recognized profit in excess of billings" or "billings in excess of costs and recognized profit" at December 31, 2020, under each of the following methods. Show supporting computations in good form.
a. Completed-contract method.
b. Percentage-of-completion method.

Answer 1

Yanmei Construction Company

Gross profit for December 31, 2020:

Completed Contract Percentage of Completion

Revenue recognized $1,500,000 $1,320,000

($1,185,800/$5,390,000 * $6,000,000)

Costs incurred $1,185,800 $1,185,800

Gross profit $314,200 $134,200

Costs and recognized profit in excess of billings

Total billing in 2020 $1,500,000 $1,500,000

Costs incurred $1,185,800 $1,185,800

Recognized profit $314,200 $134,200

Total costs + profit $1,500,000 $1,320,000

Excess of billings $0 ($180,000)

Step-by-step explanation:

a) Data and Calculations:

Estimated contract completion period = 5 years

Estimated total cost of completion = $4,500,000

Total contract price = $6,000,000

Construction costs incurred during the year = $1,185,800

Estimated cost to complete the contract = $4,204,200

Total costs to be incurred = $5,390,000

Billing = $1,500,000 (25% of $6,000,000)