Intermediate Accounting, 10 Ed
10th Edition
ISBN: 9781260310177
Author: Mark W. Nelson, Wayne B. Thomas J. David Spiceland
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 6, Problem 6.13P
Long-term contract; revenue recognition over time vs. upon project completion
• LO5–9
Citation Builders, Inc., builds office buildings and single-family homes. The office buildings are constructed under contract with reputable buyers. The homes are constructed in developments ranging from 10–20 homes and are typically sold during construction or soon after. To secure the home upon completion, buyers must pay a deposit of 10% of the price of the home with the remaining balance due upon completion of the house and transfer of title. Failure to pay the full amount results in forfeiture of the down payment. Occasionally, homes remain unsold for as long as three months after construction. In these situations, sales price reductions are used to promote the sale.
During 2018, Citation began construction of an office building for Altamont Corporation. The total contract price is $20 million. Costs incurred, estimated costs to complete at year-end, billings, and cash collections for the life of the contract are as follows:
Also during 2018, Citation began a development consisting of 12 identical homes. Citation estimated that each home will sell for $600,000, but individual sales prices are negotiated with buyers. Deposits were received for eight of the homes, three of which were completed during 2018 and paid for in full for $600,000 each by the buyers. The completed homes cost $450,000 each to construct. The construction costs incurred during 2018 for the nine uncompleted homes totaled $2,700,000.
Required:
1. Briefly explain the difference between recognizing revenue over time and upon project completion when accounting for long-term construction contracts.
2. Answer the following questions assuming that Citation concludes it does not qualify for revenue recognition over time for its office building contracts:
a. How much revenue related to this contract will Citation report in its 2018 and 2019 income statements?
b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2018 and 2019?
c. What will Citation report in its December 31, 2018,
3. Answer requirements 2a through 2c assuming that Citation recognizes revenue over time according to percentage of completion for its office building contracts.
4. Assume the same information for 2018 and 2019, but that as of year-end 2019 the estimated cost to complete the office building is $9,000,000. Citation recognizes revenue over time according to percentage of completion for its office building contracts.
a. How much revenue related to this contract will Citation report in the 2019 income statement?
b. What is the amount of gross profit or loss to be recognized for the Altamont contract during 2019?
c. What will Citation report in its 2019 balance sheet related to this contract? (Ignore cash.)
5. When should Citation recognize revenue for the sale of its single-family homes?
6. What will Citation report in its 2018 income statement and 2018 balance sheet related to the single-family home business (ignore cash in the balance sheet)?
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Discussion Question 21 at the end of Chapter 18 after Key Terms The Hawk Corporation builds yachts. The vessels it currently produces are practically identical and are completed in approximately 8 months. A customer has approached Hawk about constructing a larger yacht that would take approximately 15 months to complete. What are the tax implications of accepting the contract proposal? To fully answer this question, please address the following in your post. What is the definition of a long - term contract? Which long term contract method is required to be used by tax regulations? What is the process used to compute income using the required method?
Exercise 6-20 (Algo) Long-term contract; revenue recognition over time vs. upon project completion
[LO6-9]
On June 15, 2024, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington,
D.C., for $410 million. The expected completion date is April 1, 2026, just in time for the 2026 baseball season. Costs incurred and
estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
Costs incurred during the year
Estimated costs to complete as of December
2024
$ 50
200
2025
$ 150
2026
$ 45
50
31
Required:
1. Compute the revenue and gross profit that Sanderson will report in its 2024, 2025, and 2026 income statements related to this
contract, assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit that Sanderson will report in its 2024, 2025, and 2026 income statements related to this
contract, assuming this project does not qualify…
Exercise 6-20 (Algo) Long-term contract; revenue recognition over time vs. upon project completion
[LO6-9]
On June 15, 2024, Sanderson Construction entered into a long-term construction contract to build a baseball stadium in Washington,
D.C., for $320 million. The expected completion date is April 1, 2026, just in time for the 2026 baseball season. Costs incurred and
estimated costs to complete at year-end for the life of the contract are as follows ($ in millions):
Costs incurred during the year
Estimated costs to complete as of December 31
Required:
Required 1 Required 2 Required 3
2024
2025
2026
Construction revenue
Construction expense
Gross profit (loss)
1. Compute the revenue and gross profit that Sanderson will report in its 2024, 2025, and 2026 income statements related to this
contract, assuming Sanderson recognizes revenue over time according to percentage of completion.
2. Compute the revenue and gross profit that Sanderson will report in its 2024, 2025, and 2026 income…
Chapter 6 Solutions
Intermediate Accounting, 10 Ed
Ch. 6 - What are the five key steps a company follows to...Ch. 6 - What indicators suggest that a performance...Ch. 6 - What criteria determine whether a company can...Ch. 6 - We recognize service revenue either at one point...Ch. 6 - What characteristics make a good or service a...Ch. 6 - Prob. 6.6QCh. 6 - What must a contract include for the contract to...Ch. 6 - How might the definition of probable affect...Ch. 6 - When a contract includes an option to buy...Ch. 6 - Prob. 6.10Q
Ch. 6 - Prob. 6.11QCh. 6 - Is a customers right to return merchandise a...Ch. 6 - Prob. 6.13QCh. 6 - Under what circumstances should sellers consider...Ch. 6 - When should a seller view a payment to its...Ch. 6 - What are three methods for estimating stand-alone...Ch. 6 - When is revenue recognized with respect to...Ch. 6 - In a franchise arrangement, what are a franchisors...Ch. 6 - When does a company typically recognize revenue...Ch. 6 - Prob. 6.20QCh. 6 - Prob. 6.21QCh. 6 - Prob. 6.22QCh. 6 - Must bad debt expense be reported on its own line...Ch. 6 - Explain the difference between contract assets,...Ch. 6 - Explain how to account for revenue on a long-term...Ch. 6 - Prob. 6.26QCh. 6 - Prob. 6.27QCh. 6 - Timing of revenue recognition LO53 Estate...Ch. 6 - Allocating the transaction price LO54 Sarjit...Ch. 6 - Existence of a contract LO5-5 Tulane Tires wrote...Ch. 6 - Prob. 6.6BECh. 6 - Prob. 6.7BECh. 6 - Performance obligations; warranties LO55 Vroom...Ch. 6 - Prob. 6.9BECh. 6 - Prob. 6.10BECh. 6 - Variable consideration LO56 Leo Consulting enters...Ch. 6 - Prob. 6.16BECh. 6 - Prob. 6.17BECh. 6 - Prob. 6.18BECh. 6 - Prob. 6.19BECh. 6 - Prob. 6.20BECh. 6 - Prob. 6.21BECh. 6 - Estimating stand-alone selling prices: expected...Ch. 6 - Estimating stand-alone selling prices; residual...Ch. 6 - Prob. 6.24BECh. 6 - Prob. 6.25BECh. 6 - Contract assets and contract liabilities LO58...Ch. 6 - Long-term contract; revenue recognition over time;...Ch. 6 - Prob. 6.34BECh. 6 - Long-term contract; revenue recognition upon...Ch. 6 - Long-term contract; revenue recognition; loss on...Ch. 6 - Prob. 6.1ECh. 6 - Allocating transaction price LO54 Video Planet...Ch. 6 - Prob. 6.4ECh. 6 - Prob. 6.6ECh. 6 - Prob. 6.7ECh. 6 - Prob. 6.9ECh. 6 - Variable considerationmost likely amount; change...Ch. 6 - Variable considerationexpected value; change in...Ch. 6 - Prob. 6.12ECh. 6 - Prob. 6.13ECh. 6 - Prob. 6.14ECh. 6 - Approaches for estimating stand-alone selling...Ch. 6 - FASB codification research LO56, LO57 Access the...Ch. 6 - FASB codification research LO58 Access the FASB...Ch. 6 - Long-term contract; revenue recognition over time;...Ch. 6 - Prob. 6.1PCh. 6 - Prob. 6.2PCh. 6 - Prob. 6.3PCh. 6 - Prob. 6.5PCh. 6 - Variable consideration; change of estimate LO53,...Ch. 6 - Prob. 6.7PCh. 6 - Prob. 6.8PCh. 6 - Prob. 6.10PCh. 6 - Long-term contract; revenue recognition over time...Ch. 6 - Prob. 6.1DMPCh. 6 - Judgment Case 52 Satisfaction of performance...Ch. 6 - Judgment Case 53 Satisfaction of performance...Ch. 6 - Prob. 6.5DMPCh. 6 - Prob. 6.7DMPCh. 6 - Prob. 6.9DMPCh. 6 - Prob. 6.10DMPCh. 6 - Prob. 6.12DMPCh. 6 - Prob. 6.13DMPCh. 6 - Prob. 6.14DMPCh. 6 - Prob. 6.15DMPCh. 6 - Prob. 1CCTC
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