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On January 1, Year 1, a contractor began work on a $3.2 million construction contract that is expected to be completed in 3 years. The contractor concludes that it is appropriate to recognize revenue over time using the input method based on costs incurred (cost-to-cost method). At the inception date, the estimated cost of construction was $2.4 million. The following data relate to the actual and expected construction costs:

Year 1 Year 2 Year 3
Costs incurred $720,000 $1,170,000 $1,110,000
Expected future costs $1,680,000 $810,000 $0

For this long-term construction contract, the contractor needs to calculate the estimated dollar values of the revenue and gross profit (loss) to be recognized each year. Complete the contractor's long-term construction contract using the information above. Write the appropriate amounts in the associated cells. Indicate losses by using a leading minus (-) sign. Round all amounts to the nearest dollar. If no entry is necessary, enter a zero (0).

Revenue Gross profit (loss)
Year 1
Year 2

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Answer:

                   Revenue    Costs Incurred   Gross profit (loss)

Year 1         $768,000        $720,000            $48,000

Year 2     $1,248,000       $1,170,000               78,000

Year 3      $1,184,000       $1,110,000                74,000

Total      $3,200,000     $3,000,000          $200,000

Explanation:

a) Data and Calculations:

Construction contract = $3.2 million

Completion period = 3 years

Estimated cost of construction = $2.4 million

Construction costs:

                                             Year 1          Year 2         Year 3   Total Costs

Costs incurred               $720,000  $1,170,000   $1,110,000   $3 million

% of annual costs to total  24%               39%          37%           100%

Expected future costs $1,680,000    $810,000   $0

Annual Revenue            $768,000 $1,248,000  $1,184,000   $3.2 million

Revenue Calculation:

Costs incurred/Total costs * $3,200,000

                   Revenue    Costs Incurred   Gross profit (loss)

Year 1         $768,000        $720,000            $48,000

Year 2     $1,248,000       $1,170,000               78,000

Year 3      $1,184,000       $1,110,000                74,000

Total      $3,200,000     $3,000,000          $200,000

b) The revenue for each year is based on the costs incurred, as determined by the contractor.

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