Case 3 (45 marks) Emergency

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 1020 homes and are typically sold during construction or soon after.

During 2021, 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:

Table Summary: Summary

2021 2022 2023

Costs incurred during the year $ 4,000,000 $ 9,500,000 $ 4,500,000

Estimated costs to complete as of year-end 12,000,000 4,500,000

Billings during the year 2,000,000 10,000,000 8,000,000

Cash collections during the year 1,800,000 8,600,000 9,600,000

Required:

1. Briefly explain the difference between recognizing revenue over time and upon project completion when accounting for long-term construction contracts.

2. Answer the following questions assuming that Citation concludes it does not qualify for revenue recognition over time for its office building contracts:

a. How much revenue related to this contract will Citation report in its 2021 and 2022 income statements?

b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2021 and 2022?

c. What will Citation report in its December 31, 2021, balance sheet related to this contract? (Ignore cash.)

3. Answer requirements 2a through 2c assuming that Citation recognizes revenue over time according to percentage of completion for its office building contracts.

5. Prepare journal entries for 2021 to record the transactions.

2. What is your subject? Intermediate FInancial Acc II