Problem 18-5

Reynolds Custom Builders (RCB) was established in 1987 by Avery Conway and initially built high-quality customized homes under contract with specific buyers. In the 2002s, Conways two sons joined the company and expanded RCBs activities into the high-rise apartment and industrial plant markets. Upon the retirement of RCBs long-time financial manager, Conways sons recently hired Ed Borke as controller for RCB. Borke, a former college friend of Conways sons, has been associated with a public accounting firm for the last 6 years. Upon reviewing RCBs accounting practices, Borke observed that RCB followed the completed-contract method of revenue recognition, a carryover from the years when individual home building was the majority of RCBs operations. Several years ago, the predominant portion of RCBs activities shifted 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 percentage-of-completion method of accounting. From a typical building contract, Borke developed the following data.

BLUESTEM TRACTOR PLANT
Contract price: $8,337,000
		2014		2015		2016
Estimated costs		$1,826,010		$2,705,200		$2,231,790
Progress billings		1,887,000		3,063,000		3,387,000
Cash collections		1,775,000		2,805,000		3,280,000

Using the data provided for the Bluestem Tractor Plant and assuming the percentage-of-completion method of revenue recognition is used, calculate RCB's revenue 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. (Round percentage of completion to 2 decimal places, eg. 34.35% and final answers to 0 decimal places, eg. 1,525.) 2014 2015 2016 (2) Further assume that, as a result of unforeseen local ordinances and the fact that the building site was in a wetlands area, RCB experienced cost overruns of $875,000 in 2014 to bring the site into compliance with the ordinances and to overcome wetlands barriers to construction. (Round percentage of completion to 2 decimal places, e.g. 34.35% and final answers to 0 decimal places, e.g. 1,525.) 2014 2015 2016 (3) Further assume that, in addition to the cost overruns of $875,000 for this contract incurred under part (b)(2), inflationary factors over and above those anticipated in the development of the original contract cost have caused an additional cost overrun of $1,076,000 in 2015. It is not anticipated that any cost overruns will occur in 2016. (Round percentage of completion to 2 decimal places, e.g. 34.35% and final answers to 0 decimal places, e.g. 1,525. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) 2014 2015 2016