On June 15, 2006, Sanderson Construction entered into a long-term construction contract
to build a baseball stadium in Washington, D.C. for $220 milliion. The expected
completion date is April 1 of 2008, just in time for the 2008 baseball season. Costs
incurred and estimated costs to complete at year-end for the life of the contract are as
follows ($ in millions): 2006: 2007: 2008: Costs incurred during the year $40 $80 $50
Estimated costs to complete as of 12/31 120 60 - 1: Determine the amount of gross profit
or loss to be recognized in each of the 3 years using the Percentage-of-completion
method. 2: How much revenue will Sanderson report in its 2006 and 2007 income
statements related to this contract using the percentage-of-completion method? 3:
Determine the amount of gross profit or loss to be recognized in each of the 3 years using
the Completed contract method. 4: Suppose the estimated costs to complete at the end of
2007 are $80 million instead of $60 million. Determine the amount of gross profit or loss
to be recognized in 2007 using the Percentage-of-Completion method. Need to show
work, all calculations and or equations used.
Requirement 1
($ in millions)
Contract price
Actual costs to date
Estimated costs to complete
Total estimated costs
Estimated gross profit (actual in 2008)
2006
$220
40
120
160
$ 60
2007
$220
120
60
180
$ 40
Gross profit (loss) recognition:
2006:
$40
= 25% x $60 = $15
$160
2007:
$120
= 66.67% x $40 = $26.67 - $15 = $11.67
$180
2008:
$220 – 170 = $50 – ($15 + 11.67) = $23.33
Requirement 2
2006: $220 x 25% = $55
2008
$220
170
-0170
$ 50
2007: $220 x 66.67% = $146.67 – 55 = $91.67
2008: $220 – 146.67 = $73.33
Requirement 3
Year
2006
2007
2008
Total project income
Gross profit (loss) recognized
-0-050
$50
Requirement 4
2007:
$120
= 60% x $20* = $12 - 15 = $(3) loss
$200
*$220 – ($40 + 80 + 80) = $20