Shanahan Construction Company has entered into a contract beginning January 1, 2020, to build a parking complex. It has been estimated that the complex will cost $600,000 and will take 3 years to construct. The complex will be billed to the purchasing company at $900,000. The following data pertain to the construction period.
2020 2021 2022
Costs to date 270,000 450,000 610,000
Estimated costs to complete 330,000 150,000 0
Progress billings to date 270,000 550,000 900,000
Cash collected to date 240,000 500,000 900,000

(a) Using the percentage-of-completion method, compute the estimated gross profit that would be recognized during each year of the construction period.
(b) Using the completed-contract method, compute the estimated gross profit that would be recognized during each year of the construction period.

a. Gross profit under the percentage of completion method

2020 - $ 120,000

2021 - $ 30,000

2022 - $ 140,000

b. Gross profit under the percentage of completion method

2020 - $  0

2021 - $   0

2022 - $ 290,000

Explanation:

Computations under the percentage of completion method

                                        2020                2021                2022

                                           $                        $                       $

Costs incurred                 270,000         450,000           610,000  

Costs to complete           330,000         150,000                       0                

Total costs                         600,000         600,000         610,000

Percentage complete            45 %               66.67 %             100 %

Progress Billings                270,000          550,000          900,000

Revenue recognised based on percentages completed on total project value and decuting revenues recognized to date

Revenue recognised             45 %               66.67 %             100 %

Revenue for year                 390,000          210,000             300,000

Gross profit                           120,000             30,000             140,000

Computation under the completed contract basis

Undre a completed contract basis of revenue recognition, the revenues and expenses are deferred until the project is completed.

Gross profit on the profit is only recognised on completion of contract i.e in 2022.

Gross Profit 2020        $  0

                      2021         $ 0

                      2022      $ 290,000