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CASE DATA A construction company began operations on January 2, 2010. During the year the company was awarded three construction contracts.
CASE DATA A construction company began operations on January 2, 2010. During the year the company was awarded three construction contracts. The company incurred $300,000 operating expenses for the year for which $275,000 has been paid while the balance is owed as of December 31, 2010. Project data is summarized for each of the three projects in the following paragraphs.
Project 101: Low-Rise Office Building The initial contract was signed on January 5, 2010 in the amount of $1,000,000. This amount included $800,000 for construction costs, $150,000 for overhead mark-up, and $50,000 for profit markup. The contractor broke ground on February 4, 2010. During the course of construction the client decided to upgrade the quality of the lighting and plumbing fixtures, resulting in a change order issued to the contractor in the amount of $100,000 on October 7, 2010. The change order price was calculated by the contractor as follows: $50,000 construction costs, $37,500 overhead markup, $12,500 profit markup. At the end of 2010, construction was not complete. However, the client was renting out office space to other entities as well as using some of the offices for the client’s own business entity. Work remaining as of December 31, 2010 included surfacing the parking lot, erecting a portable parking attendant’s station, miscellaneous site concrete work and landscaping. This work was schedule to be completed by May 1, 2010, weather permitting. A summary of accounting data as of December 31, 2010 included total construction costs in the amount of $800,000 for which $600,000 was paid. The balance reflected unpaid bills for the month of December, and retention withheld on subcontracts throughout the course of the project. The total progress billing as of December 31, 2010 was $1,000,000 of which $900,000 was collected with the balance outstanding as retention receivable. The project manager estimated that given the work left to be completed, approximately $200,000 of construction cost would be incurred.
Project 102: Retaining Wall The initial contract was signed on October 17, 2010 in the amount of $100,000. The contract called for 1000 linear feet of 8 foot high retaining wall to be erected in a residential subdivision. Excavating and backfill was let to another contractor under separate contract. The estimator determined that the wall would cost $40.00 per linear foot for concrete, $10.00 per linear foot for reinforcing, and $50.00 per linear foot for labor. Average labor cost was $20.00 per hour. The hourly rate included insurances and fringes tied to labor. Overhead and profit markup were included in these unit rates. At the end of 2010 the project was not complete. The schedule indicates that backfilling of the wall would not occur until all wall installation work was complete. The project manager determined 780 linear feet of wall had been installed and 2,150 labor hours were used. It was estimated it would take $30,000 to complete the project, requiring an additional 450 labor hours. Accounting records as of December 31, 2010 indicated that total expenditures to date were $80,000 of which $70,000 were paid. Progress billings to date were $85,000 and cash collected was $76,500.
Project 103: Junior-Senior High School The initial contract was signed on August 23, 2010. The contractor broke ground on October 1, 2010. Estimated completion date is December 31, 2011. Summary data as of December 31, 2010 year end includes the following: Item Amount Contract Amount $10,000,000 Quantity Over-run on Piling $50,000 Total Costs to date $1,000,000 Amount paid to date $900,000 Total progress billings to date $1,500,000 Cash collected to date $1,300,000 Estimated additional cost to complete $7,000,000 The contractor continued work on Project 103 during 2011. The contractor was not awarded any additional contracts during 2011. Company operating expense included $300,000 paid and $50,000 unpaid. Summary data as of December 31, 2011 for Project 103 includes the following: Item Amount Contract Amount $10,000,000 Quantity Over-run on Piling $50,000 Change order total $200,000 Total Costs to date $9,500,000 Amount paid to date $9,000,000 Total progress billings to date $10,250,000 Cash collected to date $9,225,000 Estimated additional cost to complete $0 The contractor finished Project 101 and 102 in 2011. Actual cost incurred on these projects matched the additional cost to complete estimated on 12/31/2010.
PROBLEMS 1. Calculate the percent complete for Project 101 for the period ending 12/31/2010. Then, determine the earned revenue and gross profit by the applying the percentage of completion method for recognizing revenue.
2. Calculate the revenue and gross profit for Project 101 for the period ending 12/31/2010 by applying the billings method for recognizing revenue. Compare the revenue value with the value when using the percentage of completion method. Comment on the contractor’s billing practice.
3. Calculate the percent complete for Project 102 for each of the following methods: cost to cost, labor hour, and work quantity. Which method produces the most accurate result? Which method is the easiest to use? Which method should be used and why?
4. Calculate the earned revenue and gross profit for Project 102 by applying the percentage of completion method. In this case, does it matter which method is used to determine percent complete? Why or why not?
5. Calculate the revenue and gross profit for Project 102 by applying the completed contract method. What “rule” must be applied to arrive at the correct answer?
6. Calculate the company net profit before tax for the period ending December 31, 2010 for each of the following revenue recognition methods: cash, billings, percentage of completion, completed contract. Summarize your work in a table as follows: Project Item Cash Billings POC CC (without absorption) CC (with absorption) 101 Revenue Cost Gross Profit 102 Revenue Cost Gross Profit 103 Revenue Cost Gross Profit Total Gross Profit Operating Expense Net Profit (before tax)
7. State each method’s weakness when it comes to recognizing revenue.
8. Which method should be used for tax reporting, assuming the contractor qualifies for all? Why?
9. Which method should be used for measuring company performance? Why? If you owned this company would you feel warm and fuzzy at the end of 2010 or would you feel cold and clammy? Why?
10. Calculate the company net profit before tax for the period ending December 31, 2011 by applying the percentage of completion method and both forms of the completed contract method. Use a spreadsheet similar to that shown in Item 6 above. (Assume no additional projects are started in 2011.)
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