Question: P18-10 (LO5,6,7) (Long-Term Contract with Interim Loss) On March 1, 2017, Pechstein Construction Company contracted to construct a factory building for Fabrik Manufacturing Inc. for a total contract price of \(8,400,000. The building was completed by October 31, 2019. The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Fabrik for 2017, 2018, and 2019 are given below.

	2017	2018	2019
Contract cost incurred during the year	\)2,880,000	\(2,230,000	\)2,190,000
Estimated cost to complete the contract at 12/31	3,520,000	2,190,000	0
Billings to Fabrik during the year	3,200,000	3,500,000	1,700,000

Instructions

(a) Using the percentage-of-completion method, prepare schedules to compute the profit or loss to be recognized as a result of this contract for the years ended December 31, 2017, 2018, and 2019. (Ignore income taxes.)

Step by step solution

01

Definition of Income Tax

The fee paid to the government based on the benefits generated during the year from any source is known as income tax. Such tax is progressive in nature.

02

Percentage of completion method

Gross profit Recognized:

Particular	2017	2018	2019
Revenue Recognized	$3,780,000	$2,100,000	$2,520,000
Less: Cost incurred	($2,880,000)	($2,230,000)	($2,190,000)
Gross profit	$900,000	(130,000)	$330,000

Working note:

Calculation of estimated total cost:

	2017	2018	2019
Cost incurred during the year	$2,880,000	$5,110,000	$7,300,000
Add: Estimated cost to complete	3,520,000	2,190,000	0
Estimated total cost	$6,400,000	$7,300,000	$7,300,000

The formula for calculating Revenue:

$\text{Revenue=}\left(\frac{\cos \text{tincurredduringyear}}{Estimatedtoptal\cos t}\text{×Contractprice}\right)\text{-revenuerecognizedinpreviouryear}$

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