Revenue Recognition under Long-Term Construction Contracts

In June 2018, Bonded Construction Company (BCC) was hired by the City of Phoenix, Arizona, to assist in constructing its new Trade Center complex. The construction agreement called for work to begin no later than August 2018 and required Bonded to construct the concrete frame for the complex. Under the terms of the three-year contract, BCC was to receive a total of $15 million in cash payments from the City of Phoenix, to be paid as follows: 25 percent when the project was 30 percent complete, 25 percent when the project was 60 percent complete, and the remaining 50 percent, when the project was fully complete. The contract required that BCCs completion estimates be certified by an independent engineering consultant before any cash progress payments would be made.

In preparing its bid, Bonded estimated that the total cost to complete the project would be $12.45 million, assuming no cost overruns. During the first year of the contract, BCC incurred actual costs of $3.735 million, and on June 30, 2018, the engineering firm of J. Graham & Associates determined that the project had attained a 30 percent completion level. (BCCs fiscal year ran from July 1 to June 30.) In the following year, BCC incurred actual costs of $4.65 million, and on June 30, 2019, the firm of J. Graham & Associates determined that the project had attained at least a 60 percent completion level. By May 2020, BCC had completed the remainder of the project. Actual costs incurred during the year to June 30, 2020, amounted to $4.665 million. The firm received a certification for the fully completed work.

Required 1. Assuming that BCC had no other sources of revenue or expenses, determine the level of profits to be reported for the years ended June 30, 2018, 2019, and 2020, using the following revenue recognition methods:

Use a negative sign with answers only to indicate a net loss or net cash outflow. Otherwise, do not use negative signs with your answers.

a. Revenue recognition over time

	2018	2019	2020	Total
Estimated revenues
Actual expenses
Net income (loss)

b. Revenue recognition at a point in time

	2018	2019	2020	Total
Estimated revenues
Actual expenses
Net income (loss)

c. Cash basis

	2018	2019	2020	Total
Cash inflows
Cash outflows
Net cash inflow (outflow)