Citation Builders, Inc., builds office buildings and single-family homes. The of
ID: 2472194 • Letter: C
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.
During 2013, 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:
Also during 2013, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $630,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2013 and paid for in full for $630,000 each by the buyers. The completed homes cost $477,000 each to construct. The construction costs incurred during 2013 for the nine uncompleted homes totaled $2,730,000.
The percentage-of-completion method of recognizing revenues and costs on long-term construction contracts is equivalent to recognizing revenue at the point of delivery.
Answer the following questions assuming that Citation uses the completed contract method for its office building contracts:
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2013 and 2014?
How much revenue related to this contract will Citation report in its 2013 and 2014 income statements?
What will Citation report in its December 31, 2013, balance sheet related to this contract (ignore cash)?
Answer the following questions assuming that Citation uses the percentage-of-completion method for its office building contracts.
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2013 and 2014?
How much revenue related to this contract will Citation report in its 2013 and 2014 income statements?
What will Citation report in its December 31, 2013, balance sheet related to this contract (ignore cash)?
Assume that as of year-end 2014 the estimated cost to complete the office building is $9,150,000 and that Citation uses the percentage-of-completion method.
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2014?
How much revenue related to this contract will Citation report in the 2014 income statement?
What will Citation report in its 2014 balance sheet related to this contract (ignore cash)?
What will Citation report in its 2013 income statement and 2013 balance sheet related to the single-family home business (ignore cash in the balance sheet)?
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.
During 2013, 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:
Explanation / Answer
(‘1) Under Completed contract method all revenue is recognised when project is completed.
But under Percentage of completion method recognise revenue throughout the period of contract.
Under Percentage of completion method degree of completion is determined by comparing cost already incurred with the recent estimates of total expected costs to complete the project.
Hence under percentage of completion method recording of cost and recognising revenue is not equivalent to recognising the revenue at the point of delivery i.e. completed contract method.
Answer- Statement is False.
(‘2) Completed Contract Method
(‘a) and (‘b)
Particulars
2013
2014
Gross Profit
-
-
Income
-
-
As office building contract is completed in 2015 , hence income and profit will be recognised in year 2015 only.
(‘c) Actual cost incurred will be charged to Construction In Process Account, which is an Inventory account and will be shown in asset side in balance sheet as Inventory.
Extract balance sheet as at the end of year 2013
Asset
Amount
Liabilities
Amount
Current Asset
Current Liability
Inventory
Construction in Process
4,564,000
Billing on construction in process
2,300,000
Cash
2,070,000
Accounts Receivable
(2300,000-2070,000)
230,000
(‘3) Percentage of Completion Method
(‘a)
Particular
2013
2014
2015
Contract Price (A)
20,000,000
20,000,000
20,000,000
Cost Incurred in the year (B)
4564,000
9161,000
4575,000
Cost incurred to date
(C)
4564,000
13,725,000
18,300,000
Estimated Cost to complete (D)
11,736,000
4575,000
-
Total Estimated Cost (C+D) = E
16300,000
18300,000
Total Estimated Profit
(A-E) = F
3700,000
1700,000
Percentage of Completion to date C/E = G
28 %
75 %
100 %
Total Gross Profit to be Recognised ( F x G)
1036,000
1275,000
Less; Gross Profit Recognised in Previous years
0
1036,000
Gross Profit Recognised in Current Year
1036,000
239,000
(‘b)
Particulars
2013
2014
Contract Price
20,000,000
20,000,000
Percentage of Completion
28 %
75 %
Revenue to be recognised till date
5600,000
15000,000
Revenue reported in last year
0
5600,000
Revenue recognised in current year
5600,000
9400,000
(‘C) Extract Balance Sheet as on end of 2013.
Asset
Amount
Liabilities
Amount
Current Asset
Current Liability
Inventory
Construction in Process
0
Billing on construction in process
2,300,000
Cash
2,070,000
Accounts Receivable
(2300,000-2070,000)
230,000
Construction in Process is charged to expense account construction expense while recognising revenue. Rest treatment will be same as in completed contract method.
Particulars
2013
2014
Gross Profit
-
-
Income
-
-