Long-term contracts, Cost recovery method
Response to the following :
Assume the same information as in problem 1.
Required:
Determine the amount of revenue, cost, and gross profit or loss to be recognized in each of the three years under IFRS, assuming that using the percentage-of-completion method is not appropriate.
Problem 1:
Long-term contract; revenue recognition over time vs. upon project completion
On June 15, 2016, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington, D.C., for $220 million. The expected completion date is April 1, 2018, just in time for the 2018 baseball season. Costs incurred and estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
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2016
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2017
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2018
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Costs incurred during the year
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$ 40
|
$80
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$50
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Estimated costs to complete as of December 31
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120
|
60
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Required:
1. How much revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming Sanderson recognizes revenue over time according to percentage of completion?
2. How much revenue and gross profit will Sanderson report in its 2016, 2017, and 2018 income statements related to this contract assuming this project does not qualify for revenue recognition over time?
3. Suppose the estimated costs to complete at the end of 2017 are $80 million instead of $60 million. Determine the amount of revenue and gross profit or loss to be recognized in 2017 assuming Sanderson recognizes revenue over time according to percentage of completion.