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14 Jun 2018

Citation Builders, Inc., builds office buildings andsingle-family homes. The office buildings are constructed undercontract with reputable buyers. The homes are constructed indevelopments ranging from 10–20 homes and are typically sold duringconstruction or soon after. To secure the home upon completion,buyers must pay a deposit of 10% of the price of the home with theremaining balance due upon completion of the house and transfer oftitle. Failure to pay the full amount results in forfeiture of thedown payment. Occasionally, homes remain unsold for as long asthree months after construction. In these situations, sales pricereductions are used to promote the sale.

During 2016, Citation began construction of an office buildingfor 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 asfollows:

Percentage of completion Costs incurred to date Estimated coststo complete Billings to Axelrod, to date

Required:

At 12-31-2016

10% $ 350,000 3,150,000 720,000

At 12-31-2017

60% $2,500,000 1,700,000 2,170,000

At 12-31-2018

100% $4,250,000 –0– 3,600,000

Costs incurred during the year
Estimated costs to complete as of year-end Billings during theyear
Cash collections during the year

2016

$ 4,000,000 12,000,000 2,000,000 1,800,000

2017

$ 9,500,000 4,500,000 10,000,000 8,600,000

2018

$4,500,000 — 8,000,000 9,600,000

Also during 2016, Citation began a development consisting of 12identical 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 werecompleted during 2016 and paid for in full for $600,000 each by thebuyers. The completed homes cost $450,000 each to construct. Theconstruction costs incurred during 2016 for the nine uncompletedhomes totaled $2,700,000.

Required:

1. Briefly explain the difference between recognizing revenueover time and upon project completion when accounting for long-termconstruction contracts.

2. Answer the following questions assuming that Citationconcludes it does not qualify for revenue recognition over time forits office building contracts:

a. How much revenue related to this contract will Citationreport in its 2016 and 2017 income statements?

b. What is the amount of gross profit or loss to be recognizedfor the Altamont contract during 2016 and

2017?

c. What will Citation report in its December 31, 2016, balancesheet related to this contract? (Ignore cash.)

3. Answer requirements 2a through 2c assuming that Citationrecognizes revenue over time according to per- centage ofcompletion for its office building contracts.

4. Assume the same information for 2016 and 2017, but that as ofyear-end 2017 the estimated cost to complete the office building is$9,000,000. Citation recognizes revenue over time according topercentage of comple- tion for its office building contracts.

a. How much revenue related to this contract will Citationreport in the 2017 income statement?

b. What is the amount of gross profit or loss to be recognizedfor the Altamont contract during 2017?
c. What will Citation report in its 2017 balance sheet related tothis contract? (Ignore cash.)
5. When should Citation recognize revenue for the sale of itssingle-family homes?
6. What will Citation report in its 2016 income statement and 2016balance sheet related to the single-family home business (ignorecash in the balance sheet)?

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Nestor Rutherford
Nestor RutherfordLv2
16 Jun 2018

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