Question
Bower Construction Comp. has consistently used the percentage-of-completion method for recognizing revenue on its long-term contracts. During 2010 Bower entered into a fixed-price contract to
Bower Construction Comp. has consistently used the percentage-of-completion method for recognizing revenue on its long-term contracts. During 2010 Bower entered into a fixed-price contract to construct an office building for $8,000,000. Information relating to the contract is as follows:
| 2010 | 2011 | 2012 |
Percent Complete | 25% | 70% | 100% |
Estimated Total Cost at Completion | $5,600,000 | $6,400,000 | $6,500,000 |
Gross Profit Recognized to date | 600,000 | 1,120,000 | ? |
Required (Show Calculations):
1. | Compute contract costs incurred during 2010, 2011 and 2012. |
2. | Determine how much gross profit Bower should recognize in 2012. |
3. | Under what conditions would it not be reasonable for a company to use the percentage of completion method of recognizing revenue on long-term contracts? |
4. | If Bower had used the completed contract method of accounting for this long-term contract how much gross profit would it have earned in 2010, 2011 and 2012? |
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