Chapter 18 REVENUE RECOGNITION CONTINUED Sommers – ACCT 3311Long-Term Contract LossesCompleted Contract Example – 2Completed Contract Example – 2 ContinuedCompleted Contract Example – 2 ContinuedPercentage-of-Completion Example – 2Percentage-of-Completion Example – 2 Cont.Percentage-of-Completion Example – 2 Cont.Percentage-of-Completion Example – 2 Cont.Helpful Graphic from Another BookDiscussion QuestionInstallment-Sales vs. Cost-RecoveryInstallment-Sales MethodAcceptability of the Installment-Sales MethodCost-Recovery MethodPoint of Delivery ExampleExample as Installment SaleExample as Cost RecoveryIFRSIFRSIFRSIFRSPercentage-of-Completion Example – 3Percentage-of-Completion Example – 3Percentage-of-Completion Example – 3Percentage-of-Completion Example – 3Percentage-of-Completion Example – 3CHAPTER 18 REVENUE RECOGNITIONCONTINUEDSommers – ACCT 3311Loss in the Current Period on a Profitable Contract►Percentage-of-completion method only, the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods.Loss on an Unprofitable Contract►Under both percentage-of-completion and completed-contract methods, the company must recognize in the current period the entire expected contract loss.Long-Term Contract LossesCompleted Contract Example – 2 Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2011, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,000,000. Curtiss appropriately accounts for this contract under the completed contract method in its financial statements. The building was completed on December 31, 2013. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:At 12-31-11 At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000Compute gross profit or loss to be recognized in each year.Completed Contract Example – 2 ContinuedThe total contract price for construction of the building is $4,000,000. Curtiss appropriately accounts for this contract under the completed contract method in its financial statements. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:At 12-31-11 At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000Price – actual costs – estimated remaining costs = expected profitCompleted Contract Example – 2 ContinuedJust because, let’s do the journal entry to recognize profit (loss):The total contract price for construction of the building is $4,000,000. At 12-31-11At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000To recognize -0- (200,000) (50,000)Percentage-of-Completion Example – 2Curtiss Construction Company, Inc., entered into a fixed-price contract with Axelrod Associates on July 1, 2011, to construct a four-story office building. At that time, Curtiss estimated that it would take between two and three years to complete the project. The total contract price for construction of the building is $4,000,000. Curtiss appropriately accounts for this contract under the completed contract method in its financial statements. The building was completed on December 31, 2013. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:At 12-31-11 At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000Now compute gross profit or loss to be recognized in each year assuming use of percentage-of-completion.Percentage-of-Completion Example – 2 Cont.The total contract price for construction of the building is $4,000,000. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:At 12-31-11 At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000Expected profit * Percentage of completion (Unless loss!)The total contract price for construction of the building is $4,000,000. Estimated percentage of completion, accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Axelrod under the contract were as follows:At 12-31-11 At 12-31-12 At 12-31-13Percentage of completion 10% 60% 100%Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–Billings to Axelrod, to date 720,000 2,170,000 3,600,000Reported on Balance SheetPercentage-of-Completion Example – 2 Cont.Again just because, let’s do the journal entry to recognize profit (loss):The total contract price for construction of the building is $4,000,000. At 12-31-11 At 12-31-12 At 12-31-13Costs incurred to date $ 350,000 $2,500,000 $4,250,000Estimated costs to complete 3,150,000 1,700,000 –0–To recognize 50,000 (250,000) (50,000)Percentage-of-Completion Example – 2 Cont.Helpful Graphic from Another BookDiscussion QuestionQ18-20 Explain the differences between the installment-sales method and the cost-recovery method.When the