Answered Essay: In June 2014, Biltmore Construction Company (BCC) was hired by the City of Phoenix, Arizona, to assist in constructing its new Trade Center complex. The

Revenue Recognition Under Long-Term Construction Contracts. In June 2014, Biltmore Constris Company (BCC) was hired by the City of Phoenix, Arizona, to assist in constructing its new Trade Ceme complex. The construction agreement called for work to begin no later than August 2014 and requiredB more to construct the concrete frame for the complex. Under the terms of the three-year contract, BOc to receive a total of $10 million in cash payments from the City of Phoenix, to be paid as follows: 25 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 im was estimates be certified by an independent engineering consultant before any cash progress payments wold ie made. In preparing its bid, Biltmore estimated that the total cost to complete the project would be $8.3 million assuming no cost overruns. During the first year of the contract, BCC incurred actual costs of $2.49 m and on June 30, 2015, the engineering firm of J. Graham& Associates determined that the project had attind a 30 percent completion level. (BCCs fiscal year ran from July I to June 30.) In the following year, BCC incurred actual costs of $3.1 million, and on June 30, 2016, the firm of J. Graham & Associates determinod that the project had attained at least a 60 percent completion level. By May 2017, BCC had completed the remainder of the project. Actual costs incurred during the year to June 30, 2017, amounted to $ 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, 2015, 2016, and 2017, using the following revenue recogn methods a. Percentage of completion b. Completed contract c. Cash basis Which set of results best reflects the economic performance of the company over the period 2015-20 Why? 2. 17

In June 2014, Biltmore 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 2014 and required more to construct the concrete frame for the complex. Under the terms of the three-year contract, BCC was to receive a total of $10 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 BCC’s completion estimates be certified by an independent engineering consultant before any cash progress payments would be made. In preparing its bid, Biltmore estimated that the total cost to complete the project would be $8.3 million, assuming no cost overruns. During the first year of the contract, BCC incurred actual costs of $2.49 million, and on June 30, 2015, the engineering firm of J. Graham & Associates determined that the project had attained a 30 percent completion level. (BCC’s fiscal year ran from July 1 to June 30.) In the following year, BCC incurred actual costs of $3.1 million, and on June 30, 2016, the firm of J. Graham & Associates determined that the project had attained at least a 60 percent completion level. By May 2017, BCC had completed the remainder of the project. Actual costs incurred during the year to June 30, 2017, amounted to $3.11 million. The firm received a certification for the fully completed work. 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, 2015, 2016, and 2017, using the following revenue recognition methods: a. Percentage of completion b. Completed contract c. Cash basis 2. Which set of results best reflects the economic performance of the company over the period 2015-2017? Why?

Expert Answer

 

a. Percentage of completion method :
Jun 30,2015 2016 2017
1.Total estimated contract revenue-Total estimated contract costs=Total estimated gross margin= 10-8.3= 1.7 Millions
2. % age of completion (as per Engg. Consultant) 30% 60% 100%
3.Total estimated contract revenue*Estimated completion % age =Total amount of revenue that can be recognized—30%*10;60%*10;100%*10 3 6 10
4.Total amount of revenue that can be recognized- Contract revenue recognized to date through the preceding period= Revenue amt. that can be recognized in the current accounting period—(3-0);(6-3);(10-6) 3 3 4
5.Total estimated contract Cost*Estimated completion percentage =Total amount of cost that can be recognized—30%*8.3;60%*8.3;100%*8.3 2.49 4.98 8.3
6.Total amount of cost that can be recognized- Contract cost recognized to date through the preceding period= Cost amt. that can be recognized in the current accounting period(2.49-0),(4.98-2.49);(8.3-4.98) 2.49 2.49 3.32
7. Gross profit to be reported for the year —–(6-4) 0.51 0.51 0.68
b.Completed contract method
Gross profit to be reported for the year 0 0 1.3
c. Cash basis
2015 2016 2017
Completion level 30% 60% 100%
Actual Costs Incurred 2.49 3.1 3.11
So, revenue to be recognised as % agreed 25% 25% 50%
Revenue in $(25%*10);25%10);(50%*10) 2.5 2.5 5
Profit for the Yr. to be recognised(revenue-costs) 0.01 -0.6 1.89
2
Percentage of completion method reflects, most accurately, the economic performance of the company as it matches estimates of costs & revenues, giving weightage to the level of completion of long-term projects ,without waiting till the end of the project . Also unlike cash basis method, in which we need to wait till the expense is incurred or revenue is earned.
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