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APPENDIX 18A LONG-TERM CONSTRUCTION CONTRACTS

Revenue Recognition Over Time

CHAPTER 18 Occurs when one of two conditions exist:
1. Customer controls asset as it is created or
enhanced.
REVENUE RECOGNITION
2. Company does not have an alternative use for
asset created or enhanced and either
a) customer receives benefits as company
performs the task, or
b) company has a right to payment and this right
is enforceable.

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Revenue Recognition Over Time Revenue Recognition Over Time
Two Methods of accounting:
One or both criteria are met in long-term construction
contract accounting.  Percentage-of-Completion Method
 Long-term contracts frequently provide that seller ► Recognize revenues and gross profits
(builder) may bill purchaser at intervals. each period based upon the progress of
the construction
 Examples:
 Development of military and commercial aircraft
► Buyer and seller have enforceable rights
 Weapons delivery systems  Cost Recovery Method
 Space exploration hardware ► Recognize revenues and gross profit only
when the contract is completed
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Revenue Recognition Over Time
II. Revenue Recognition Before Delivery
Companies must use Percentage-of-Completion when
Long-Term Construction Accounting Methods estimates of progress toward completion, revenues, and
costs are reasonably dependable and all the following
exist:
Percentage-of-Completion Cost Recovery (zero 1. Contract specifies enforceable rights regarding
Method profit) Method
goods or services by parties, consideration to be
exchanged, and manner and terms of settlement.
1) Buyer and seller have 1) To be used only when
enforceable rights
2. Buyer can be expected to satisfy all obligations.
the percentage method is
2) Buyer has legal right to inapplicable OR 3. Contractor can be expected to perform the
require specific performance, 2) Inherent hazards in the contractual obligations.
3) Seller has right to require contract beyond the normal,
progress payment. recurring business risks.

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Revenue Recognition Over Time Percentage-of-Completion Method
Companies should use the cost-recovery method
Revenue to Recognized Cost-to-Cost Basis
when one of the following conditions applies:
 When a company has primarily short-term Illustration 18-1A

contracts, or
 When a company cannot meet conditions for using
the percentage-of-completion method, or Illustration 18-2A

 When there are inherent hazards in the contract

beyond the normal, recurring business risks.

Illustration 18-3A

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Percentage method:
Percentage-of-Completion: Example 1
Contract price = 200
yr Cost % complete Revenue Revenue – 2019 2020 2021
incurred to date to date current period Costs incurred during
the year $100,000 $186,000 $314,000
1 $30
Estimated costs to complete 400,000 264,000 ---
2 $30 Progress billings during the year 80,000 350,000 270,000
3 $40 Cash collected during the year 50,000 330,000 320,000
Total contract price: $700,000

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1. To record construction costs:
Construction in Progress 100,000
2019 2020 2021
Materials, Accounts Payable, etc. 100,000
Construction costs incurred to 2. To record partial billings:
date
Accounts Receivable 80,000
Estimated costs to complete 80,000
Total estimated costs 3. To record collections:
Percent complete Cash 50,000
Revenue to date Accounts Receivable 50,000
Revenue recognized for the 4. To record gross profit:
year
Construction costs incurred
for the year
Gross profit recognized
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2021 2020 2021
1. To record construction costs:
314,000 4. To record gross profit:
Construction in Progress 186,000
Accounts Payable, etc. 186,000 314,000 Construction Expense 186,000 314,000
2. To record partial billings:
Accounts Receivable 350,000 Revenue from LT Contract 224,000 336,000
270,000
Billings on CIP 350,000 270,000
3. To record collections:
Cash 330,000 320,000
Accounts Receivable 330,000 320,000

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Percentage-of-Completion Billings on CIP Statement of Financial Position 2019 2020 2021
Construction in process 80,000 Current assets
100,000 80,000 2019 Inventories
40,000 350,000 2020 Construction in Process
2019 140,000 430,000 Less: Billings on CIP
186,000 270,000 2021
38,000 Costs and recognized profit not yet
700,000 700,000 billed
2020 364,000
314,000 0 Accounts receivable $30,000 $50,000
22,000 Accounts Receivable Current liabilities
2021 700,000 700,000 2019 30,000 Billings on Construction in Process
2020 350,000 330,000 Less: Construction in Process
0
50,000 Billings in excess of costs and
270,000 320,000 recognized profit
2021 0
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Cost-Recovery Method Cost recovery method
Construction in process Billings on CIP
4. To record gross profit and close out accounts:
2019 100,000 80,000
2019 2020
2020 186,000 2019
Construction Exp. 100,000 186,000 80,000
286,000
Revenue from LT contract 100,000 186,000 350,000 2020
2021 314,000
100,000 430,000
270,000 2021
700,000 700,000
700,000 700,000
0
0

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Cost-Recovery Method Percentage-of-Completion Method
Statement of Financial Position 2019 2020 2021
Current assets
Income statement 2019 2020 2021
Inventories Construction revenue $140,000 $224,000 $336,000
Construction in Process Construction expense (100,000) (186,000) (314,000)
Less: Billings on CIP
Gross profit $40,000 $38,000 $22,000
Costs and recognized profit not yet $20,000
billed
Cost-Recovery Method
Accounts receivable $30,000 $50,000
Income statement 2019 2020 2021
Current liabilities
Billings on CIP
Construction revenue
Less: Construction in Process Construction expense
Billings in excess of costs and Gross profit
recognized profit
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Example-2 2019 2020 2021 Percentage Method 2020 2021
Construction costs incurred during Construction costs incurred to date
the year $100,000 $186,000 $364,000
Estimated costs to complete the Estimated costs to complete
contract 400,000 364,000 --- Total estimated costs
Partial billing to customer 80,000 350,000 270,000 Percent complete
Collections from customer 50,000 330,000 320,000
Total contract price: $700,000 Revenue to date
Revenue recognized for the year
Construction costs incurred for the
year
Gross profit recognized

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Recognizing Current & Overall Losses
on Long-Term Contracts Loss on Long-term Construction
Percentage Method: Contracts
Recognize loss currently.
current-period adjustment Example 3- at the end of 2020
Loss in the Current Period of gross profit recognized
in prior periods 2019 2020 2021
on a Profitable Contract
Construction costs incurred during
Cost recovery method: the year $100,000 $186,000 $429,000
No adjustment needed. Estimated costs to complete the
contract 400,000 429,000 ---
Percentage Method: Billings to customer current year 80,000 350,000 270,000
Loss on an Recognize entire loss now. Collections from customer 50,000 330,000 320,000
Total contract price: $700,000; overall loss $15,000
Unprofitable Contract
Cost recovery method:
Recognize loss currently.
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Example-3
2019 2020 2021
Construction costs incurred to Construction costs incurred to date
date
$100,000
Estimated costs to complete
Estimated costs to complete 400,000
Total estimated costs
Total estimated costs 500,000
Percent complete
Percent complete 20%
Revenue to date
Revenue to date $ 140,000
Revenue recognized for the year
Revenue recognized for the
year
$140,000
Construction costs expensed
Construction costs incurred
for the year 100,000 Total loss recognized
Gross profit recognized Reversal of 2019 gross profit
$ 40,000
Estimated loss

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in 2020
Percentage-of-Completion Method Case 1: Profitable project
Illustration: KC Construction Company has a contract to construct a
$4,500,000 bridge at an estimated cost of $4,000,000. The contract is
to start in July 2019, and the bridge is to be completed in October
2021. The following data pertain to the construction period.
2019 2020 2021
Cost-Recovery Method Costs to date $1,000,000$2,916,000 $4,050,000
Estimated costs to complete 3,000,000 1,134,000 ---
Progress billings during the year 900,000 2,400,000 1,200,000
Cash collected during the year 750,000 1,750,000 2,000,000
Total contract price: $4,500,000
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Case 1: Profitable project Percentage-of-Completion Method
Income statement 2019 2020 2021
Construction revenue
Construction expense
Gross profit

Cost-Recovery Method
Income statement 2019 2020 2021
Construction revenue
Construction expense
Gross profit

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SFP 2019 2020 2021
Case 2: Loss in a profitable project
Current assets
$ 150,000 $800,000 Illustration: KC Construction Company has a contract to construct a
Accounts receivable
$4,500,000 bridge at an estimated cost of $4,000,000. The contract is
to start in July 2019, and the bridge is to be completed in October
Inventories
2021. The following data pertain to the construction period.
Construction in Process$1125,000
2019 2020 2021
Less: Billings on CIP 900,000
Costs to date $1,000,000$2,916,000 $4,384,962
Costs and recognized profit not yet 225,000 Estimated costs to complete 3,000,000 1,468,962 ---
billed Progress billings during the year 900,000 2,400,000 1,200,000
Current liabilities Cash collected during the year 750,000 1,750,000 2,000,000
Billings on Construction in Process 3300,000 Total contract price: $4,500,000

Less: Construction in Process 3240,000

Billings in excess of costs and 60,000
recognized profit
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Case 2: Loss in a profitable project Case 3: Loss in a project
Illustration: KC Construction Company has a contract to construct a
$4,500,000 bridge at an estimated cost of $4,000,000. The contract is
to start in July 2010, and the bridge is to be completed in October
2012. The following data pertain to the construction period.
2010 2011 2012
Costs to date $1,000,000$2,916,000 $4,384,962
Estimated costs to complete 3,000,000 1,640,250 ---
Progress billings during the year 900,000 2,400,000 1,200,000
Cash collected during the year 750,000 1,750,000 2,000,000
Total contract price: $4,500,000

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Case 3: Loss in a project
Illustration: Casper Construction Co.

A) Calculate gross profit recognized in 2010, 2011, and

2012.
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Illustration_I
Illustration: Loss on Profitable Contract

Casper Construction Co.

b) Calculate gross profit recognized in 2010, 2011, and

2012 assuming the estimated cost to complete at the
end of 2011 was $215,436 instead of $170,100.

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Illustration:_I Loss on Profitable Contract Illustration: Loss on Unprofitable Contract

Casper Construction Co.

c) Calculate gross profit recognized in 2010, 2011, and

2012 assuming the estimated cost to complete at the
end of 2011 was $246,038 instead of $170,100.
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Illustration: Loss on Unprofitable Contract