Exercise 5–21
SUMMARY
Gr. Profit Recognized Over Time Gr. Profit Recognized Upon
Completion
Situation 2018 2019 2020 2018 2019 2020
1$166,667 $233,333 $100,000 $0 $0 $500,000
6$(100,000) $(100,000) $(100,000) $(100,000) $(100,000) $(100,000)
Situation 1 – Revenue Recognized Over Time
2018 2019 2020
Contract price $5 ,000,000 $5 ,000,000 $5 ,000,000
(actual in 2020) $ 500 ,000 $ 500 ,000 $ 500 ,000
Gross profit (loss) recognized:
2018:
Revenue = $1,500,000
Note: We can calculate gross profit directly as
2019:
Revenue = $3,600,000
Exercise 5–21 (continued)
Note: We can calculate gross profit directly as:
$3,600,000
2020:
Revenue = $5,000,000 – 4,000,000 = $1,000,000
Situation 1 – Revenue Recognized Upon Completion
Year Gross profit recognized
2018 – 0 –
Situation 2 – Revenue Recognized Over Time
2018 2019 2020
Contract price $5 ,000,000 $5 ,000,000 $5 ,000,000
(actual in 2020) $ 500 ,000 $ 200 ,000 $ 200 ,000
Exercise 5–21 (continued)
Gross profit (loss) recognized:
2018:
Revenue = $1,500,000
$1,500,000
Revenue = $2,400,000
= 50.0% × $5,000,000 = $2,500,000 – 1,666,667
Note: We can calculate gross profit directly as:
$2,400,000
2020:
Revenue = $5,000,000 – $2,500,000 = $2,500,000
Situation 2 – Revenue Recognized Upon Completion
Year Gross profit recognized
2018 – 0 –
Exercise 5–21 (continued)
Situation 3 – Revenue Recognized Over Time
2018 2019 2020
Contract price $5 ,000,000 $5 ,000,000 $5 ,000,000
(actual in 2020) $ 500 ,000 $ (100 ,000) $ (200 ,000)
Gross profit (loss) recognized:
2018:
Revenue = $1,500,000
Note: can calculate gross profit directly as
2019:
Overall loss of $5,000,000 – 5,100,000 = $(100,000)
2020:
Overall loss of $5,000,000 – 5,200,000 = $(200,000)
Exercise 5–21 (continued)
Situation 3 – Revenue Recognized Upon Completion
Year Gross profit (loss) recognized
2018 – 0 –
Situation 4 – Revenue Recognized Over Time
2018 2019 2020
Contract price $5 ,000,000 $5 ,000,000 $5 ,000,000
(actual in 2020) $1 ,000,000 $ 625 ,000 $ 500 ,000
Gross profit (loss) recognized:
2018:
Revenue = $ 500,000
Note: can calculate gross profit directly as
Exercise 5–21 (continued)
2019:
Revenue = $3,500,000
Note: can calculate gross profit directly as
$3,500,000
= 80.0% × $625,000 = $500,000 – 125,000 = $375,000
Gross Profit = $1,000,000 – 1,000,000 = $ – 0 –
Situation 4 – Revenue Recognized Upon Completion
Year Gross profit recognized
2018 – 0 –
2019 – 0 –
2020 $500,000
Actual costs to date 500,000 3,500,000 4,800,000
Estimated costs to complete 3 ,500,000 1 ,500,000 – 0 –
Total estimated costs 4 ,000,000 5 ,000,000 4 ,800,000
Exercise 5–21 (continued)
Gross profit (loss) recognized:
2018:
Note: can calculate gross profit directly as
$500,000
2020: $200,000 – 0 = $200,000
Situation 5 – Revenue Recognized Upon Completion
Year Gross profit recognized
2018 – 0 –
2019 – 0 –
Exercise 5–21 (concluded)
Situation 6 – Revenue Recognized Over Time
2018 2019 2020
Contract price $5 ,000,000 $5 ,000,000 $5 ,000,000
(actual in 2020) $ (100 ,000) $ (200 ,000) $ (300 ,000)
Gross profit (loss) recognized:
2018: $(100,000)
Situation 6 – Revenue Recognized Upon Completion
Year Gross profit (loss) recognized
2018 $(100,000)
Exercise 5–22
Requirement 1
Construction in progress = Costs incurred + Profit recognized
Requirement 2
Billings = Cash collections + Accounts receivable
Requirement 3
Let A = Actual cost incurred + Estimated cost to complete
A
$128,000,000,000 – 80,000A = $20,000A
Estimated cost to complete = $1,280,000 – 80,000 = $1,200,000
Exercise 5–22 (concluded)
Requirement 4
$80,000
= 6.25%
Alternatively, Requirement 4 can be answered as follows:
Proportion of gross profit recognized to date:
$20,000
= 6.25%