Citation Builders, Inc., builds office buildings and single-family homes. The of
ID: 3120860 • 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 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:
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.
Which method is most 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:
How much revenue related to this contract will Citation report in its 2016 and 2017 income statements?
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017? (Loss amounts should be indicated with a minus sign.)
What will Citation report in its December 31, 2016, 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.
How much revenue related to this contract will Citation report in its 2016 and 2017 income statements?
What is the amount of gross profit or loss to be recognized for the Altamont contract during 2016 and 2017? (Loss amounts should be indicated with a minus sign.)
What will Citation report in its December 31, 2016, balance sheet related to this contract? (Ignore cash.)
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 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:
Explanation / Answer
1. As per Accounting Standard " Accounting for Recognising of Revenue" issued by the Institute of Chatrered Accounatnt, revenue in the long term construction contracts are recognised as per the completion cost method. It means that the contractors will reconise revenue as a percentage of cost incurred tilll the reporting date on the total estimated cost. However, as in general business, revenues are reconised as per the matching concept principle applying the concept of consevatism. It simply means that revenue for the particular year is recognised as per the amount received or receivable for the work done in respect of that particular year. whereas in long term construction contract revenues are reconised as per cost of completion method as explained above irrecpective of amount received or receivable subject to cot escaltion.
2. As Citation is not qualified for revenue recognition over time for its office building contracts:
a. Citation will recognise revenue in respect of Office building contracts as per cost of completion method:
For Year 2016,
so percentage of Completion = Cost incurred till date / estimated cost to completed the contract
= 4000000/12000000
= 33.33%
So, Revenue for 2016 = 20000000*33.33%
= $ 6,666,000
For Year 2017,
percentage of Completion = Cost incurred till date / estimated cost to completed the contract
= (4000000+9500000) / (12000000+4500000)
= 81.82%
So, Revenue for 2017 = 20,000,000*81.82%- $ 6,666,000
= $ 8,181,818.18 - $ 6,666,000
= $9,698,000
b. Amount of gross profit or loss to be rcognised for the contract of Altamount contract:
For the year 2016,
i. Revenue = $ 6,666,000
ii. Cost incurred till date = $ 12,000,000
iii. Gross profit (i-ii) = $ 5,334,000
For the year 2017,
i. Revenue = $ 9,698,000
ii. Cost incurred During the year = $ 9,500,000
iii. Additional cost estimated to incur = $ 2,000,000
iv. Gross profit/ (loss) (i-ii-iii) = ($ 1,802,000)
c. As per the Companies Act, the Citation will report in its balance sheet that the company has undertaken a long term construction contract from Altamount Corporation and 33.33 % work has been completed as per the cost of completion method. Accordingly, revenue of $ 6,666,000 has been recoginsed wheresa billed has been raised of $ 2,000,000 and cash has been collected of $ 1,800,000.
4. If at the year end, the cost estimated to incurr in the next year exceed beyond the initially estimated cost then such cost shall be recorded as the Additional cost applying th econcept of prudence. Accordingly,
a. Revenue of 2017
percentage of Completion = Cost incurred till date / estimated cost to completed the contract
= (4000000+9500000) / (12000000+9000000)
= 64.29%
So, Revenue for 2017 = 20,000,000*64.29%- $ 6,666,000
= $ 12,857,143.86 - $ 6,666,000
= $ 6,191,142.86
b. Amount of gross profit or loss to be rcognised for the contract of Altamount contract:
i. Revenue = $ 6,191,142.86
ii. Cost incurred During the year = $ 9,500,000
iii. Additional cost estimated to incur = $ 6,500,000
iv. Gross profit/ (loss) (i-ii-iii) = ($ 9,808,857.14)
c. The Citation will report in its balance sheet for the year end on December, 2017 ,that the company has undertaken a long term construction contract from Altamount Corporation and by 2017 it has completed 64.29 % as per the cost of completion method. Accordingly, revenue of $ 6,191,142.86 has been recoginsed wheresa billed has been raised of $ 10,000,000 and cash has been collected of $ 8,600,000.
5. Revenue for the sale of its single-family homes for the year 2016 = 5* (10% of $ 600,000) + (3*600,000)
= $ 2,100,000
6. The Citation will report in its balance sheet for the year end on December, 2016 ,that the company has undertaken a long term construction contract for the sale of its single-family homes and by 2016 it has completed sold 3 flats and from 5 customers it has received 10% deposits.