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Question: P18-11 (LO5,6,7) EXCEL (Long-Term Contract with an Overall Loss) On July 1, 2017, Torvill Construction Company Inc. contracted to build an office building for Gumbel Corp. for a total contract price of \(1,900,000. On July 1, Torvill estimated that it would take between 2 and 3 years to complete the building. On December 31, 2019, the building was deemed substantially completed. Following are accumulated contract costs incurred, estimated costs to complete the contract, and accumulated billings to Gumbel for 2017, 2018, and 2019.

	At 12/31/17	At 12/31/18	At 12/31/19
Contract cost incurred to date	\)300,000	\(1,200,000	\)2,100,000
Estimated cost to complete contract	1,200,000	800,000	0
Billings to Gumbel	300,000	1,100,000	1,850,000

Instructions

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 Gross Profit

A financial metric determining the profitability of the business entity by adjusting the direct costs with the revenue generated is known as gross profit.

02

Gross profit under the percentage of completion method

Particular	2017	2018	2019
Revenue recognized	$380,000	$1,140,000	$1,900,000
Less: Cost to date	(300,000)	(1,200,000)	(2,100,000)
Gross profit	$80,000	($60,000)	($200,000)
Less: Gross profit recognized in the previous year	0	$80,000	($100,000)
Profit	$80,000	$20,000	$300,000

Working note:

Particular	2017	2018	2019
Cost to date (A)	$300,000	$1,200,000	$2,100,000
Add: Estimated cost to complete contract	$1,200,000	$800,000	$0
Estimated total cost (C)	$1,500,000	$2,000,000	$2,100,000
Percentage of completion $\left(\frac{A}{C}×100\right)$	20%	60%	100%

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