Using Percentage-of-Completion Evergreen Construction specializes in constructing golf courses. Currently, Evergreen has four golf courses under construction.

Evergreen spends an average of 30 to 36 months in doing earth moving, building water hazards, constructing the club house, completing roads and cart paths, and related work.

Another 6 to 12 months is spent sodding, planting, and doing other finish work. The president of Evergreen was especially pleased with reported profits in 2001. Three golf courses were finished and record profits were reported. The company uses the completed-contract method of income recognition.

The president is somewhat concerned about the profit picture for the future, however. One of the projects in progress is much larger than normal, with a total contract price of $6,000,000, and will not be completed until late in 2003. At the end of 2002, you are provided with the following data relating to the project and asked to assess its success thus far:

Evergreen’s goal is to earn a profit of 20 percent on the base price of the contract. Because the completed-contract method is used, no income has been reported on this project.

a. Prepare a report that shows the president the amount of income that would have been recognized on the project by Evergreen in 2000, 2001, and 2002 if the percentage-ofcompletion method had been used.

b. What is your assessment of 2002 operations on this project?

c. What amount of cost savings would be needed in 2003 to meet the desired level of profit? What is your assessment of the prospects of attaining the desired level of profit on the project? Explain.

Transcribed Image Text:

Costs to Expected Additional Total % Expected Com- Year Date Cost Profit pleted 2000 $ $4,800,000 $1,200,000 0% 2001 1,200,000 3,400,000 1,400,000 20 2002 4,300,000 1,100,000 600,000 80