Reference no: EM132794619
Question - Seasons Construction has been participating in two construction projects. One is to construct office building. Another one is to construct industrial building.
Under project A, it is constructing an office building under contract for Cannon Company. The contract calls for progress billings and payments of $1,550,000 each quarter. The total contract price is $18,600,000 and Seasons estimates total costs of $17,750,000. Seasons estimates that the building will take 3 years to complete, and commences construction on January 2, 2018. At December 31, 2018, Seasons estimates that it is 30% complete with the construction, based on costs incurred.
Under project B, Seasons is to construct an industrial building, starting from April 2018, and the project is expected to be completed in September 2020, at an estimated cost of $22,000,000. At the end of 2018, the costs to date were $10,120,000 and the estimated total costs to complete had not changed. The progress billings during 2018 were $4,800,000 and the cash collected during 2018 was $3,200,000.
It is the company policy to use percentage of completion method for both projects.
Requirements -
(a) What is the amount of Revenue recognized from project A for the year 2018 and what is the balance in the Accounts Receivable account for project A as at 31 December 2018 assuming Cannon Company has not yet made its last quarterly payment. Show workings.
(b) What is the gross profit recognized from project B for the year 2018? Calculate the balance of Construction in Process as at 31 December 2018. Show workings.
(c) Explain why the contractor should have progress billings on the customers.
(d) A person argue that revenue should only be recognized when the goods are delivered to customer under the general principle of revenue recognition, and thus the accounting treatment for the revenue to be recognized over the years of constructions instead of being recognized when the project is completed and the goods are delivered to customer is not appropriate. Do you agree with him? Why?
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