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a 98 Chapter 18 Revenue Recognition la) Using the pencentage-of-completion method, comspube t the estimated gross profit recognized in the vears 2014-2016 b) Prepare a partial balance sheet for December 31, 2015, showing the halances in the meceivables and inventory accounbs P1s-5 (Completed-Contract and Percentage-of-Completion with Interim Loss) Reynolds Custom 5 Builders (RCB) was established in 1987 by Avery Conway and initially built high-quality customized markets. Upon the setire- homes under contract with specific buyers I expanded RCB's activities into the high-rise apartment and industrial plant ment of RCB's long-time financial manager, Conway's sons recently hire RCB. Borke, a former college friend of Conway's sons, has been associabed withap for the last 6 years. In 2002, Conway's two sons joined the Ed Borke as controller for firm accounting practices, Borke observed that RCB followed the compieted contract method of revenue recognition, a carryover from the years when individual home the majority of RCB's operations Several years ago, the predominant portion of RCE's activities shifhed to the high-rise and industrial building areas, From land acquisition to the completion of construction, most building contracts cover several years. Under the circumstances, Borke believes that RCB should follow the method of accounting, From a typical building contract, Borke developed the ollowing data. BLUESTEM TRACTOR PLANT Contract price: $8,000,000 2015 2016 $1,600,000 $2.880,000 $1,920,000 000,000 2.500,000 4500.000 800,0002,300,000 4,00,000 Estimated costs Progress billings Cash collections Instructions (a) Explain the difference between completed-contract revenue recognition and percentage-of-completicn revenue recognition. (b) Using the data provided for the Bliuestem Tractor Plant and assuming the percentage-of-completion method of revenue recognition is used, cakculate RCB's nevenue and gross profit for 2014, 2015, and 2016, under each of the following circumstances (1) Assume that all costs are incurred, all billings to customers are made, and all collections from customers are received within 30 days of billing, as planned (2) Further assume that, as a result of unforeseen local ordinances and the fact that the build- ing site was in a wetlands area, RCB experienced cost overruns of $800,000 in 2014 to bring the site into compliance with the ordinances and to overcome wetlands barriers to construction. (3) Further assume that, in addition to the cost overruns of $800,000 for this contract incurred unde part (b)(2), inflationary factors over and above those anticipated in the development of th original contract cost have caused an additional cost overrun of $850,000 in 2015. It is anticipated that any cost overruns will occur in 2016 CMA adap 4) ,Tone-Term Contract with Interim Loss) On March 1, 2014, Pechstein Construction C
